CNP CenterPoint Energy
Quality Texas wires utility earning allowed returns, but 2.2x book still prices in growth that allowed returns cannot justify.
The story
CenterPoint is a regulated wires and gas utility whose largest asset is Houston Electric, supported by strong Texas load growth and a capex plan of more than $60B that grows rate base at a high single-digit pace. Earned ROE of about 10% on $11.15B of book is consistent with allowed returns of roughly 9.5-10%. The balance sheet is leveraged but typical for a regulated utility; storm-cost recovery and equity issuance to fund capex are the main drags. The stock fell from 40.83 to 36.84 with no change to fundamentals, but at about 2.2x book it still prices in more than an allowed-return utility can earn.
No facts changed, so I kept the drivers. A 9.8% ROE is anchored to allowed returns and matches the trailing 10%. 7% book growth reflects rate-base capex funded partly with new equity. Terminal growth of 3.5% is below the 5.18% risk-free rate, and beta stays at the 0.55 industry anchor. Because ROE only slightly exceeds a cost of equity of about 7.7%, the residual-income value sits well below the market price. The market is paying for a longer high-growth runway than the model gives credit for.
Value drivers
| Return on equity (normalized) | 9.8% |
| Book-value growth (Y1) | 7.0% |
| Terminal book growth | 3.5% |
| Beta | 0.55 |
| Failure probability | 1.0% |
| Cost of equity | 7.7% |
Valuation bridge
| PV of excess returns | 2.07B |
| PV of terminal excess | 4.58B |
| Equity value | 17.62B |
| ÷ shares → per share | $26.75 |
News
neutral +0.10 · 8 articles
- National Fuel’s Latest Move Could Redefine its Utility and Gas Businesses
- SO's Georgia Power Signs Google Deal to Boost Nuclear Capacity
- Is CenterPoint Energy Underperforming the Nasdaq?
- CenterPoint (CNP) Upgraded to Buy: What Does It Mean for the Stock?
- Should CenterPoint’s Disaster-Linked Credit Flexibility Reshape How Investors View CNP’s Balance Sheet Risk?
- ENLAY vs. CNP: Which Stock Should Value Investors Buy Now?
- After Plunging 6.3% in 4 Weeks, Here's Why the Trend Might Reverse for CenterPoint (CNP)
- Why CenterPoint Energy (CNP) is a Top Dividend Stock for Your Portfolio
Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 11.15B | 9.8% | 238.79M | 221.80M |
| 2 | 11.93B | 9.8% | 255.50M | 220.44M |
| 3 | 12.72B | 9.8% | 272.39M | 218.29M |
| 4 | 13.51B | 9.8% | 289.34M | 215.38M |
| 5 | 14.30B | 9.8% | 306.22M | 211.73M |
| 6 | 15.08B | 9.8% | 322.89M | 207.37M |
| 7 | 15.84B | 9.8% | 339.22M | 202.36M |
| 8 | 16.58B | 9.8% | 355.05M | 196.73M |
| 9 | 17.29B | 9.8% | 370.23M | 190.56M |
| 10 | 17.97B | 9.8% | 384.63M | 183.88M |
Key risks
- Texas regulatory pushback on storm and resiliency cost recovery after Hurricane Beryl, which could compress earned ROE
- Equity issuance to fund a capex plan of more than $60B, diluting per-share book growth
- Higher-for-longer rates raising the cost of equity and pressuring the valuations of bond-like utilities
Catalysts
- Data-center and industrial load wins in Houston that lift rate-base growth guidance
- Constructive rate case outcomes and securitization of storm costs