Entergy: Green Hydrogen Emerging as a Growth Driver; Remains a Top Utilities Pick

We are reaffirming our $120 fair value estimate for Entergy ETR after the company announced a memorandum of understanding with Monarch Energy to support Monarch’s planned 300 megawatt green hydrogen electrolyzer in South Louisiana. We are reaffirming our narrow moat rating.

We consider this another sign that Entergy will be a leader among U.S. utilities developing green hydrogen infrastructure. Electricity demand growth in the Gulf Coast, renewable energy development, and network upgrades represent the bulk of our $16 billion capital investment forecast for Entergy in 2023-25. This supports our 7% annual earnings growth outlook during the next five years.

We think Entergy’s investment plan could go higher with more opportunities like the Monarch partnership, which could total $400 million of investment. We also expect the U.S. Department of Energy to announce this fall the 6-10 regional hydrogen hub proposals that will split $7 billion of federal grants. At least four of the 33 final-round proposals are in or near Entergy’s service territory.

Entergy trades at a 21% discount to our fair value estimate, making it one of the cheapest U.S. utilities we cover. Its 4.5% dividend yield is one of the highest in the sector, and its 14 P/E is below the utilities sector median 16 P/E. We think Entergy offers attractive yield, growth, and potential valuation upside.

Entergy recently asked Louisiana regulators to extend its formula rate plan and a $173 million rate increase. We don’t think regulators will grant that full rate increase, but we do think they will extend the FRP, a constructive ratesetting framework that will support Entergy’s investment plan. Entergy also has regulatory support to add 3 gigawatts of wind and solar in Louisiana.

We continue to expect 2023 core earnings to climb 7% on a weather-normalized basis and finish within management’s $6.55-$6.85 EPS guidance range.