Morningstar | CMS Records Another Solid Quarter and Long-Term Growth Plan on Track
We are reaffirming our $40 fair value estimate and narrow-moat rating for CMS Energy after the company reported $1.93 per share of operating earnings in the first nine months of 2018, up 16% from the first nine months of 2017. Management raised its 2018 earnings per share guidance range to $2.31-$2.34, in line with our $2.33 estimate.Favorable weather has added $0.20 per share in 2018, making year-over-year growth higher than we would expect on a normalized basis. The weather benefits should allow management to pull forward 2019 planned maintenance spending in the second half of 2018 so a fall-off in weather won't derail its 6%-8% long-term EPS growth outlook. This is in line with our forecast. CMS management initiated 2019 earnings guidance at $2.46-$2.50 per share, in line with our $2.48 estimate and implying 6.5% growth.
In the near term, CMS' electric rate case is important for investors to watch. We continue to think a settlement is possible and the risk of a negative outcome minimal. If we normalize the allowed capital structures in CMS' $44 million rate request and opponents' rate cut proposals, the difference in proposals is relatively small. We think CMS might accept a compromise if regulators support its proposed five-year, $3 billion distribution rate tracker, which would provide more predictable earnings and cash flows similar to CMS' gas rate trackers.
Even if CMS receives a disappointing outcome in its electric rate case and a likely gas rate case next year, we still think it can still secure support for its five-year, $10 billion investment plan, supporting our growth outlook.
We think management's strategic plan to use Enerbank as a source of cash, potentially resulting in a sale, is a positive for shareholders.
CMS Energy is a holding company. The company has several subsidiaries, including: Consumers Energy Company, an electric and gas utility that serves individuals and businesses operating in the alternative energy, automotive, chemical, food, and metal products industries, as well as a group of other industries; CMS Enterprises Company, through its subsidiaries and equity investments, is engaged in domestic independent power production, including the development and operation of renewable generation, and the marketing of independent power production; and EnerBank USA, an industrial bank located in Utah that provides unsecured consumer installment loans, primarily for financing home improvements.
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