On Thursday, JPMorgan (NYSE:JPM) updated its financial outlook on PG&E Corporation (NYSE:PCG), increasing the price target to $25.00 from the previous $23.00, while maintaining an Overweight rating on the stock. The adjustment follows the California Public Utilities Commission's (CPUC) decision to approve changes to the cost of capital mechanism and reduce the return on equity (ROE), which now stands at 10.28% for PG&E, a decrease from 10.70%.
The analyst from JPMorgan highlighted that the third quarter of 2024 would be pivotal for addressing considerations related to the impact of ROE revisions, which are only expected to affect PG&E's financials in 2025 since the next cost of capital cycle begins in 2026. The modifications are also seen as reducing downside risk over the next cycle. Additionally, California's ROEs continue to be higher than the national average.
PG&E's conservative guidance prior to the trigger is expected to minimize the financial impact from the change in ROE, as the company had planned to reinvest ROE upside. The latest filing from PG&E includes a request for $3.1 billion for 2025-26, which is $2.8 billion net of a $300 million shift from 2024, and a decision from the CPUC is sought in the first quarter of 2025. The capital expenditure for energization is viewed positively, and with a focus on clearing the backlog of energization requests, a substantial portion of the $3.1 billion is anticipated to be approved.
The receipt of the first wildfire fund payment for the Dixie Fire is also a significant topic of discussion for the third quarter, serving as a proof of concept. Further updates on the company's plans are expected mostly in the fourth quarter, with less clarity on the initiation of forward-year guidance between the third and fourth quarters.
Finally, the analyst is looking for any incremental status updates on the Form Energy's 5MM/500MW Long-Duration Energy Storage (LDES) project, which is funded by the CPUC and located at one of PG&E's sites. For the quarter, JPMorgan forecasts an adjusted earnings per share (EPS) of $0.33 for PG&E, which is a $0.09 increase year-over-year compared to $0.24 in the third quarter of 2023.
The rise is primarily attributed to higher capital investment, General Rate Case (GRC) timing impacts, operations and maintenance (O&M) savings, and reinvestment.
InvestingPro Insights
PG&E Corporation's (NYSE:PCG) financial outlook appears to align with JPMorgan's positive stance. According to InvestingPro data, PCG's revenue growth stands at 11.29% for the last twelve months as of Q2 2024, with a notable quarterly revenue growth of 13.16% in Q2 2024. This growth trajectory supports the company's ability to invest in capital projects and potentially offset the impact of the reduced ROE.
InvestingPro Tips highlight that PCG is trading at a low P/E ratio relative to near-term earnings growth, with a PEG ratio of 0.61. This suggests that the stock may be undervalued considering its growth prospects, which could provide upside potential in line with JPMorgan's increased price target.
Additionally, the company's strong return over the last five years, as noted in the InvestingPro Tips, reflects its resilience and recovery efforts post-wildfire challenges. This performance, coupled with the fact that PCG is trading near its 52-week high, indicates investor confidence in the company's strategic direction and operational improvements.
For investors seeking more comprehensive analysis, InvestingPro offers 7 additional tips for PCG, providing a deeper understanding of the company's financial health and market position.
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