Idacorp offers a play on cheap power production and artificial intelligence. Its stock looks like a buy. By Al Root

When you play Monopoly, you avoid the utilities -- they're boring and don't make much money. In the game of life, however, picking up shares of Idacorp, Idaho's regulated electric utility, looks like a winning play.

Boise-based Idacorp's principal operating subsidiary is Idaho Power, a 109-year-old utility serving some 650,000 retail customers in southern Idaho and eastern Oregon. It generates about two-thirds of the power it delivers to customers, while purchasing the rest. About 20% of the power it generates comes from coal, which the company plans to replace with gas by 2030, while more than half comes from relatively low-cost hydropower, which helps keep costs low for Idahoans. The average price paid by Idacorp customers is less than 10 cents per kilowatt-hour, almost one-third of what Northeasterners pay for their electricity.

Northeastern envy isn't a good reason to buy the stock, though. Growth is. The company sees 8.3% demand growth over the next five years, up from about 1% over the past five. That growth is underpinned by low prices, population inflow, and power-hungry data centers producing cheap electricity for artificial-intelligence computers. Meta Platforms, for instance, is building a data center in Kuna, Idaho, about 20 miles outside of Boise.

"It's just about the fastest-growing utility in the country right now," says John Bartlett, president and portfolio manager of Reaves Asset Management. The growth rate, expected to be about twice the industry norm, makes the shares look cheap. They trade for about 17 times estimated 2027 earnings and yield 3% -- in line with utility averages.

The stock hasn't been outperforming, however. Shares are up 6% year to date, about one percentage point behind the Vanguard Utilities exchange-traded fund, which yields a little less than 3%. It didn't help that Idacorp stock traded down about 2% following its May 1 first-quarter earnings report, when the company announced earnings per share of $1.10, seven cents ahead of Wall Street estimates, while reiterating full-year EPS guidance of $5.65 to $5.85. Investors might have been looking for a more substantive update on power rates and capital spending, writes Mizuho analyst Anthony Crowdell, adding that he thought the quarter was fine.

"We view the Idacorp story as one of the strongest in the sub--$10 billion market-cap group," says Crowdell, who rates shares Outperform and has a $124 price target for the stock, up about 7% from recent levels.

That might not seem like much upside, but it is partly a function of the sector. The median upside for an electric utility stock in the Russell 3000 is about 8% from current levels. Regulated utilities are supposed to be steady Eddies. Few expect them to double over a short period, but returns can be solid. With typical earnings growth for the sector of 6% to 7% and dividend yields of 3%, a 10% total annual return is possible, says Bartlett. Unregulated utilities such as Constellation Energy take more risks on pricing and capacity expansion, hoping to boost asset returns and earnings growth.

Idacorp, however, is unusual as a regulated utility with unregulated-like growth. Wall Street projects that earnings will grow close to 8% a year for the coming three years, but Bartlett sees growth better than that as generation capacity expands. It could look more like Constellation's 14% average annual earnings growth. Idacorp stock, however, doesn't trade like Constellation, which fetches 26 times estimated 2026 earnings. Crowdell sees the opportunity for shares to "rerate" to a higher price/earnings ratio, but that isn't reflected in his target price.

Utilities aren't risk free. Because they're often bought for income, rising long-term bond yields tend to weigh on the sector's valuation multiples, something that's out of Idacorp's control. The group can also suffer "rate lag" -- when regulators drag out the price increases that enable growth and expansion of capacity. That's something Idacorp can influence. "Our efforts to reduce regulatory lag [and] provide more timely cost recovery are certainly under way," said Tim Tatum, Idacorp's vice president of regulatory affairs, on his company's first-quarter conference call. "We're hopeful for success in that area." Idacorp is planning to file a "rate case" in late May or early June. A favorable outcome with regulators could give shares a boost later this year.

It's necessary, too, as Idacorp invests for growth. Siebert Williams Shank analyst Christopher Ellinghaus expects the company to spend $5.6 billion on new plants and equipment over the coming five years, up from $2.8 billion spent from 2020 to 2024. Higher spending could pressure the balance sheet. The company's net debt is 4.3 times as large as its estimated earnings before interest, taxes, depreciation, and amortization, or Ebitda, higher than investors might be used to, but about average for an electric utility.

The company is taking steps to make sure its balance sheet doesn't become a problem. Earlier this month, Idacorp raised $575 million in equity capital by selling 5.2 million shares. The sale solidifies the equity financing needed through 2026, says Ellinghaus, who has equity dilution factored into his earnings model. He rates shares Buy and has a $129 price target for the stock, up 11% from recent levels. "The company has a slew of electricity resource and transmission investments in the hopper," he adds, designed to serve "some of the fastest prospective electricity customer, sales...and rate base growth in the industry."

The risks look manageable, the growth substantial, and the valuation reasonable, making Idacorp stock an undiscovered gem in the Gem State.

Write to Al Root at allen.root@dowjones.com

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May 23, 2025 21:30 ET (01:30 GMT)

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