PPL Corporation Stock: A Bright Outlook And Good Entry Point, Buy (NYSE:PPL)

Investment Thesis

PPL Corporation (NYSE:PPL) is down about 0.29% underperforming the S&P 500 by a margin of about 27.43% over the last year.

Despite this dismal performance, I am bullish on this stock in the long term. My optimism stems from the company’s robust regulatory structure and diverse utility operations which serve as competitive advantages. Further, my bullish stance is backed by the company’s attractive earnings growth outlook backed by solid drivers. From a valuation and technical standpoint, the company is attractive offering a favorable entry point to potential investors. For these reasons, I recommend this stock to potential investors at its current price. My price target is about $40 which translates to an upside potential of about 45.45%.

Company Profile

This company is an energy organization that generates, transmits, and distributes electricity. It is customer-centric, people-driven, and digitized. PPL has a strong focus on clean energy transition with affordability and reliability. The company serves about 3.6 million customers in the US. It serves through three major segments whose revenue contribution is shown below.

The firm is planning to an expansive infrastructure investment of about $12 billion by 2026 and enjoys over $37 billion in total assets. PPL is known for its commitment to safety, reliability, and operational efficiency which is clearly shown by its savings of about $75 million in Q4 2023 and its safe and reliable delivery of electricity and natural gas to approximately 3.6 million customers.

Based on this background, this profile shows that this company is actively investing in infrastructure to support sustainable future energy. Further, the company’s commitment to customer service and safety reflects its deliberate attempt to customer satisfaction and the broader community welfare. In general, its profile appears to be in line with recent trends in the sustainable and innovative energy sector.

Financials

Considering that financial health is very essential for any successful investment, let me walk you through PPL’s financial status. Beginning with revenue, this company has been very consistent in growing its revenue. To support this, I will refer to the company’s 5.19% YoY revenue growth which is way above the sector median of 0.36%, and its 3-year CAGR of 14.94%. This steady performance in my view suggests that the company could be effectively attracting and retaining customers and possibly penetrating new markets. This is a sign that PPL is thriving and it is likely to continue growing in the future.

Its operating income has been increasing consistently since 2021 growing from $1.48 billion in 2021 to $1.80 billion in 2023. This highlights the company’s ability to manage costs something that signifies the company’s operational efficiencies. In addition, the company’s net income has been turbulent but the overall trend suggests a resilient company in terms of profitability with 2021 the only year the company experienced net losses over the last decade something I attribute to covid 19 challenges.

Let’s look at the balance sheet and evaluate how solid the company’s financial footing is. PPL has a total debt of $15.76 billion and a total equity of $13.93 billion translating to a debt-to-equity ratio of 1.1. This is slightly above the recommended leverage of 1 but I still find it not to be a major risk because there are no major maturities until 2029 and beyond. Indeed, $11.5 billion of the total debt matures in 2029 and beyond and there are no maturities this year. This means that this company has a very stable and flexible financial footing which can favour investment in growth opportunities.

Most importantly, its total assets of $39.24 billion cover its total debt by about 2.5x which is a safe position. In a nutshell, this company has a stable balance sheet with minimal debt risk something which guarantees an easy investment in growth opportunities.

To sum up the company’s financial state, PPL has a very healthy financial situation characterized by consistent and resilient financial performance and a stable balance sheet. With the optimistic outlook, which I will discuss later, I believe this company will keep delivering strong financial performance something I expect the market to reward with growing share prices hence my bullish stance.

Regulated Model And Diverse Operations

A robust regulatory structure and diversified utility operations represent PPL’s two major pillars for its growth in the long run. Let’s dive deeper here and understand these two aspects better. First off, PPL operations are tied within a robust regulatory framework. This model ensures stability in cash flows and mitigates exposure to market volatility. To support this assertion, PPL has been reporting billions of positive operating cash flows for over a decade despite several economic, geopolitical, and pandemic challenges.

The structure or rather the model extends across constructive regulatory jurisdictions in Kentucky, Rhode Island, and Pennsylvania among other regions and it serves about 3.5 million customers. This regulatory framework contributes significantly to shaping the company’s growth strategy in several ways some of which I will mention here.

The first one is rating base growth. In its updated business plan including a $14 billion in capital investments by 2027, it was aimed at aligning with regulatory mechanisms that reduce regulatory lag. The move enabled the company to estimate an average growth of 5.6% annually through 2026 with a growth of more than 7% in the closing part of the plan.

Secondly is the supporting transition to green energy. PPL’s strategic initiatives include shifting its coal-fired fleet in Kentucky in support of its objective of net-zero emissions by 2050. This planned transition is contingent on regulatory support. The above two ways are just examples of the ways that this model is impacting the company’s operations and growth strategies something I believe will be key in the company’s growth.

This regulatory structure contributes to my bullish stance in that, it allows the company to have a presence in multiple states leading to a diverse customer base which translates to a wide revenue stream. Further, the model is low-risk and rate-regulated which allows predictability in revenue and prevents the company exposure to market fluctuations. This is where stability in cash flows stems and therefore future cash flows are almost secure.

The second parameter is the company’s diversity in utility operations. PPL’s diversity stems from electricity and gas distribution not forgetting its electricity generation. Its subsidiaries such as Kentucky Utilities and Louisville Gas serve more than 1.3 million customers and consistently rank among the best in customer service in the US. The company’s electric utilities deliver electricity to approximately 1.4 million homes and businesses in central and eastern Pennsylvania while its Rhode Island energy serves more than 770,000 customers.

In my view, this diversity is a competitive advantage because it enables the company to adapt to changing market conditions and customer demands through its diverse offerings and vast presence. Above all, PPL’s commitment to operation excellence, safety and reliability, and customer service further solidifies its competitive position.

This diversity aligns with my bullish stance because it not only distributes the company’s risk to different revenue streams thus mitigating the risks of relying on one market segment which could be detrimental in case of a market failure, but also the effort of a collaborative and diverse culture is healthy for growth and favors a bullish outlook. This adds to the fact that diversity is a competitive advantage that ought to help in attracting and maintaining new customers something which modes well for future growth.

A Positive Outlook

PLL reported an optimistic outlook which I believe is very attractive to investors. It includes a 2024 earnings forecast between $1.63-$1.75 per share whose midpoint of $1.69 is 7% higher than the 2023 midpoint forecast. Additionally, the company announced a 7.3% quarterly common stock dividend increase as discussed earlier in this article which adds to the optimistic outlook. To add on the bright future is the company’s extended competitive 6%-8% annual EPS and dividend growth target extension to at least 2027.

I strongly believe that setting targets is one thing and achieving them is another. For this reason, I would like to highlight the growth drivers which I believe will make this outlook feasible. The first driver is operation efficiency. With the company’s focus on efficient operations which has seen its target of $50-$60 million in O&M savings exceeded by achieving $75 million in savings, I believe its earnings will receive a major boost from this initiative. The company is targeting to achieve savings between $120-$130 by 2024 and $150 by 2025. To achieve this, the company is aiming to cut total operating costs by reducing fuel costs and energy purchases.

In addition, the other growth driver is the investment in infrastructure. Following the execution of a $2.4 billion investment to improve service to customers and enhance grid resilience, I expect this company to increase its renewable energy and electrification something I anticipate will catalyze the growth of its top and bottom lines.

Another driver is the company’s capital increase and green energy transition. PPL has increased its capitation plan to more than $14 billion by 2027 expecting to raise the rate base growth to 6.3%. This move has come alongside its focus on shifting to cleaner energy while ensuring reliability, affordability, and safety. In my view, this capitation, which is aimed at improving customer experience, especially in the wake of increased demand for green energy will go a long way in ensuring customer satisfaction and perhaps a growing customer base which bodes well for the company’s future growth.

Above, favorable market trends sum up the growth drivers for the optimistic future. Firstly, according to Mordor Intelligence, the US renewable energy market is projected to grow by a CAGR of 10.01% something I believe vindicates the company’s focus to shift to cleaner energy.

Further, EIA projects that US power consumption will hit record highs in 2024 and 2025 with an estimated demand of 4,112 billion kWh in 2024 and 4,123 billion kWh in 2025 compared to 3,994 kWh in 2023 and a record 4,070 billion kWh in 2022. This signifies historically high demand which I believe will be reflected in the company’s financials. Given the company’s competitive position and its increasing capitation and infrastructure investment, I expect this company to leverage these favorable trends and achieve and possibly exceed its future projections.

Valuation And Technical Analysis

In valuing this company, I will use the forward PE ratio and its projected EPS. I will then combine this estimate with technical analysis to arrive at an actionable investment decision. Considering PPL’s GAAP forward PE of 16.36 and its 2028 EPS estimate of $2.23, multiplying these inputs yields a price target of about $36.48 in the next five years. With this estimation, the relative valuation metrics also show that the market is optimistic about PPL’s prospects. This is justified by the company’s forward PE of 16.36 being higher than the sector median of 15.96 indicating that investors expect higher earnings growth from this company something which aligns with the optimistic outlook discussed above. With a PS ratio of 2.44 being above the sector median of 2.07, it shows that the market expects this company to experience a high sales growth rate in the future. This expectation can be justified by the company’s consistent growth in revenues as discussed in the financial section.

Let’s look at the technical point of view alongside this estimation based on fundamentals. To begin with, PPL has four major zones. This first one is the demand zone which lies at the support level at about $23. The other zones are the mitigated, unmitigated POI, and the unmitigated zones as shown below.

Let me walk you through each of them in relation to price movement. Looking at the price movement, there lies a strong support level in the demand zone with the price having tested the zone three times since 2011 and two of the three times have been in 2020 and 2023. This implies that a buy decision is justified in or slightly above this zone. The mitigated zone marks an area which the price exploited since its dip from its highs of about $51 to its lows of about $23. The price bounced back from the support zone and formed a new high at about $40 which was lower than the $51 high which represented a break of structure and hence the origin of the unmitigated zone marked with the blue arrow above. After bouncing off the new resistance level at about $40, the price declined to retest the support zone in 2020 where it bounced off weakly and hence the retest in 2023. It’s worth noting that the new resistance level at $40 hasn’t been retested hence the unmitigated point of interest [POI].

Given this background, here are the possible price actions. First off, the price is likely to rise and retest the resistance level at $40 to obey the new structure hence my projection as marked by the arc and this informs my decision of $40 as my target price. This possibility is backed by the mitigated zone which the price exploited. Should the price exploit this zone, investors should be patient at the support level because a trend reversal towards the support zone is possible just like a possibility of a break out to exploit the unmitigated zone is possible. A breakout would be confirmed by the price crossing above $43.53 while a trend reversal would be confirmed by confirmed by the price crossing the $36.92. These two points are the decisional points if the price exploits the projected unmitigated POI.

As it stands, a buy decision is justified because the price just crossed above the demand zone marking a potential bullish trajectory. To get a clear direction, let’s look at other technical indicators. Based on the moving averages, it appears that this stock has entered a bullish trajectory. The price has moved above the 50-day and 100-day MAs an indication that it is in a bullish momentum.

Interestingly, the oscillators are supporting a bullish outlook too. Currently, the MACD has just crossed the signal line an indication that the bullish momentum has just set in which is a perfect entry point. Further, the RSI is currently at 57.9 slightly above the neutral point of 50 and significantly below the overbought zone of 70. This shows that this stock has an ample runway before reaching the oversold regions hence a buy decision is justified.

In conclusion, from a valuation and technical standpoint, this stock offers a perfect entry point for potential investors at its current price. With its positive outlook backed by solid growth levers, I think this is a good investment opportunity.

Risks

While I am bullish on this stock, I would like to highlight the potential risks of investing here. It should be noted that this company is operating capital-intensive infrastructures whose maintenance and upgrading could be costly stressing the company’s financial health. For example, its capital plan to invest $14.3 billion between 2024 and 2027 translates to a substantially high outlay which could have a material effect on its finances. To be precise, this investment is 88.22% of the total revenue realized in 2022 and 2023 combined. This is without a substantial amount which could hurt the company, especially if it doesn’t pay off.

Secondly, this company is subject to government regulations which call for strict adherence failure to which could result in sanctions or penalties hurting its financial abilities and reputation.

Conclusion

In conclusion, PPL is a good investment opportunity with a bright future and solid growth levers. From a technical and valuation point of view, the current price offers a perfect entry point and this leads me to a buy recommendation.