PPL Earnings: Operating Expense Management Offsets Year-to-Date Headwinds

We are maintaining our $29 fair value estimate for narrow-moat PPL PPL after the company reported third-quarter operating earnings per share of $0.43 compared with $0.41 in the year-ago period. The company narrowed its full-year EPS guidance to $1.55-$1.60 from $1.50-$1.65.

The company’s 6%-8% earnings outlook is unchanged; we expect PPL to achieve the midpoint. We expect dividend growth to be in line with earnings growth. We viewed PPL shares as expensive at the beginning of the year, but they now trade at a 12% discount to our fair value estimate as of Nov. 2.

A decision on PPL’s Kentucky subsidiary’s plans to replace coal generation is expected within the next week. The decision should determine the path forward for coal plant retirements in the state. A slower path to retiring coal generation could lead to slower growth in the region. Additional capital would be needed to keep the current coal fleet compliant with environmental regulations. PPL also has additional growth opportunities at its other subsidiaries.

The company is on track to invest $2.5 billion in 2023, part of its $12 billion investment plan through 2026. The capital investment plan supports our earnings growth estimate.

The company’s previous asset rotation makes it one of the few utilities that shouldn’t need to issue equity to fund its growth plan. Additionally, PPL has limited exposure to floating-rate debt.

In the quarter, the company benefited from lower operating expenses and capital investments and higher approved customer rates. Partially offsetting these benefits was higher interest expense. Management has done a good job managing operating expenses with the acquisition of Rhode Island Energy. Management said it is on track to meet its $50 million-$60 million savings target this year, part of its broader long-term $175 million cost-reduction goal.