NiSource Earnings: New Investment Opportunities Support Growth Outlook; Top Utilities Pick

We are reaffirming our $33 fair value estimate for NiSource NI after the company reported $0.19 per share of operating earnings in the third quarter, up from $0.10 in the same period last year. Year-to-date earnings are up 10% from last year and on track to meet our full-year estimate and the high end of management’s $1.54-$1.60 EPS guidance range. We are reaffirming our narrow moat rating.

Several updates from management support our view that NiSource has some of the best long-term growth prospects in the sector. Combined with constructive regulation, we expect NiSource to grow earnings faster and for longer than most other utilities.

NiSource’s stock trades at a 24% discount to our fair value estimate as of Oct. 31, making it one of the cheapest U.S. utilities. Its 4% dividend yield and 16 P/E are in line with the sector medians, but we think the stock should trade at a premium because of NiSource’s long-term growth potential and regulatory support.

Management raised its five-year capital investment plan by 7% to $16 billion in 2024-28, implying 8%-10% annual regulatory asset growth and 6%-8% annual EPS growth, in line with our outlook. Management also initiated 2024 EPS guidance of $1.68-$1.72, implying at least 7% growth. We expect dividend growth to track earnings growth.

Management also detailed $2 billion of potential investment opportunities pending regulatory support. NiSource has a history of regulatory support, particularly in Indiana, its largest service territory. Additional growth investments likely would lead us to raise our fair value estimate.

We also have confidence in management’s financing plan. NiSource’s significant equity needs will keep earnings growing more slowly than the regulatory asset base. However, earnings growth could trend toward 8% annually if NiSource finds low-cost financing opportunities like the $2.15 billion minority interest sale of its Indiana electric utility earlier this year.