Eoneren The Company

DTE Energy (NYSE:DTE) is a $23-billion market cap diversified energy company based in Detroit. It has operating units including Detroit Edison and MichCon that serve millions of customers in Southeastern Michigan. While utility revenues make up half of the company’s total revenue, DTE has expanded into non-utility energy businesses, such as power and industrial projects, fuel transportation, and marketing. The company’s fuel mix comprises approximately 40% coal, 20% nuclear, and 22% natural gas, with plans to increase the use of renewable fuels.

DTE aims to phase out coal usage at specific plants by 2028 and 2040 and achieve net-zero carbon emissions by 2050. In Q3 FY2023, DTE reported operating earnings of $298 million or $1.44 per share, a decrease from $311 million or $1.60 per share in the same period of 2022.

This decline was attributed to cooler summer temperatures, impacting earnings by ~$0.15 per share, and an increase in summer storms. The utility also faced higher one-time operating and maintenance (O&M) cost reductions for storm protection. Despite these challenges, DTE demonstrated effective cost management, with operating expenses falling by 50% to $2.3 billion in 3Q FY2023 compared to $4.7 billion last year.

DTE recently received regulatory approval for its Integrated Resource Plan, outlining investments in renewable energy assets. The company plans to add 1000 MW of renewable energy annually through 2025 and has filed for approval of a five-year $9 billion capital plan for grid improvement. Looking ahead, DTE anticipates investing $45 billion in DTE Electric and MichCon over the next decade, focusing on distribution infrastructure and cleaner generation, with additional plans to replace aging infrastructure and reduce greenhouse gas emissions at DTE Gas through a $3 billion investment plan.

Although the company received a lower-than-expected rate increase in its 2022 electric rate case, management lowered its 2023 operating EPS forecast to $5.65-5.85 from $6.09-6.40, citing higher 4Q FY2023 storm expenses and lower electricity demand. However, DTE expects these challenges to be offset by O&M reductions and energy trading contract premiums, with management maintaining a projection of 7% growth in operating EPS through FY2027.

As far as valuation, DTE shares appear to be fairly valued at first glance. First off, Seeking Alpha’s Quant Valuation score is ‘C-‘, with several key metrics being in line with the sector medians. Furthermore, DTE cannot be said to pay an outstanding dividend, as its TTM yield is 47 basis points lower than the sector median and also below its long-term average.

While DTE presents potential opportunities, it’s crucial to consider associated risks before investing. One significant risk is the company’s sensitivity to natural gas prices due to its reliance on energy trading. Fluctuations in natural gas prices can impact DTE’s financial performance. Additionally, regulatory challenges in the utility sector pose a risk, as changes in regulations can influence the company’s operations, rates, and profitability.

Despite a temporary dip in 3Q FY2023 operating earnings, management’s updated FY2024 EPS forecast suggests robust future performance, possibly reaching low double-digit EPS growth in FY2024. By combining the forward dividend yield of ~3.74% with the nominal growth in EPS (amid a maintained P/E ratio), there is potential upside by the end of FY2024, indicating that DTE stock is currently undervalued. Therefore, I rate DTE stock as a ‘Buy’ today.