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Scotiabank set its price target for Xcel Energy at $77 on Tuesday. This is a routine move that places the firm's expectation below the average analyst target of about $91, though still above where the stock trades today. For a utility like Xcel, these targets usually track how much the company is allowed to earn from its massive spending on power plants and grid upgrades. While this specific target is on the lower end, it does not change the broader view that the company's $60 billion investment plan is the main driver of its value.
Source: Scotiabank
Morgan Stanley lowered its price target for the utility to $83 from $89 on Friday. The firm kept its rating at the equivalent of a hold, suggesting it sees the stock as fairly valued for now. Even with the lower target, the firm's outlook remains well above the current price of about $70. Other analysts are generally more optimistic, with an average target across all firms of $92.
Source: Morgan Stanley
Truist Financial lowered its price target for the utility from $94 to $88. Even with the lower target, the firm still sees the stock as worth more than its current price of about $77. Other analysts have a slightly higher average target of $92. Small target changes like this are routine for utility stocks, which are sensitive to interest rates. When rates stay high, investors often demand a higher return from utilities to compete with safe bonds, which can lead analysts to trim their price targets.
Source: Truist Financial
Yields on 30-year Treasury bonds, which track the interest rates the government pays to borrow money, have climbed back to levels not seen in nearly two decades. This move was driven by higher oil prices and stronger-than-expected manufacturing data, which suggest inflation and interest rates may stay higher for longer.
This matters for Xcel because it is currently in the middle of a massive 60 billion dollar plan to upgrade its power grid and build new wind and solar farms. Utility companies rely heavily on debt to fund these projects. When rates rise, it costs more to borrow that money, which can eat into profits if state regulators do not allow the company to pass those higher costs on to customers through their monthly bills.
Source: Bloomberg Markets and Finance
The company earned $0.93 per share this quarter, up from $0.75 a year ago and ahead of what analysts expected. While revenue of $3.12 billion was lower than the $3.54 billion target, the business is more focused on its profit margin. Most of the growth came from recovering the costs of its power grid and plant upgrades through customer rates.
This is the core of the utility business model: the company spends money to build things like wind farms and transmission lines, and regulators allow it to earn a set profit on those assets. Higher interest rates are making it more expensive to borrow money for these projects, but so far the earnings from new investments are more than covering those extra costs. Management also kept its full-year profit outlook unchanged.
See the full quarter, and how our tracked metrics did
Source: 8-K filing
Xcel has moved from a string of misses to a run of beats, suggesting management has found its footing and is now setting targets it can reliably exceed.
| Expectation | |
|---|---|
| EPS | $1.31 |
| Revenue | $4.24B |
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