Eversource Energy equity research

The brief

Eversource is an energy provider serving customers in Massachusetts, Connecticut and New Hampshire. For my SMU Equity Analysis and Portfolio Management class, my group and I compiled a research report covering the company, the industry and competitive landscape, and a full financial analysis of the firm, paired with a three-statement model valued with a dividend discount model, book value, a discounted cash flow model and comparables.

The view

We were constructive on the business. The regulatory environment looked favourable going into 2024, particularly around the clean energy and climate targets for 2035 and 2050, and utilities as a sector hold up in a recession.

The risks we landed on were regulatory risk that stops Eversource passing costs through to customers, higher interest rates raising the cost of debt on a balance sheet that already carries a lot of it, and rising delinquencies if energy prices climb.

Against that, the case for the upside was electrification and the shift away from traditional energy, supported by their M&A activity, renewable projects, a growing customer base and above all their infrastructure spending.

The valuation

For a regulated utility, the dividend discount model and book value carry the most weight. Eversource spends more on its network than its operations bring in and funds the gap with debt and new shares, so its free cash flow is negative and a cash flow model says more about the terminal assumptions than about the business. Its earnings come from the return regulators allow on the assets it has built, which makes book value the natural anchor.

The dividend discount model gave $42 a share and book value about $44. Pricing that book on a return on equity of 9.3% against a cost of equity of 7.4% to 9.1% gives $46 to $64.

Against a price of $53.04, the stock looked fairly valued, with room to re-rate if interest rates fell.