CMS Energy Earnings: Warm Winter, Storms Set Up Difficult Path To Reach 2023 Goals

We are reaffirming our $55 fair value estimate for CMS Energy CMS after the company reported first-quarter adjusted EPS of $0.70, down from $1.20 in the first quarter of 2022 primarily due to an extreme year-over-year change in winter weather. Earnings are on track to meet our full-year outlook despite the slow start to the year. We are reaffirming our narrow moat and stable moat trend ratings.

The flip from a colder-than-normal winter in 2022 to a substantially warmer-than-normal winter this year along with higher storm expenses resulted in a $0.27 per-share negative year-over-year impact.

CMS will have to make up the weather impact with cost savings during the rest of the year to achieve management’s $3.06-$3.12 EPS guidance range and 6%-8% annual growth target. CMS has a history of overcoming the impact of weather-related earnings through cost savings, but this year will be particularly difficult assuming normal summer weather.

We continue to forecast 7% annual average earnings growth through 2025 based on normal weather. Although this is a faster growth rate than the utilities sector average, we think the stock is too rich. The stock trades at a 14% premium to our fair value estimate as of April 28. Its 3.1% dividend yield is well below the sector average and its 20 P/E is well above the sector average.

CMS has relatively low regulatory risk this year, which means weather and operating costs are the primary factors for earnings this year. CMS plans to file an electric-rate request in the second quarter and we expect a gas-rate decision from regulators later this year. The outcome of both proceedings will have an impact on earnings growth in 2024. We assume constructive outcomes for both proceedings, including reaffirmation of a 9.9% allowed return on equity for both businesses.

Our long-term growth outlook is based on what we estimate will be $13 billion of capital investment during the next four years, in line with management’s investment plan.