Sempra

Sempra: SRE reported earnings in line with consensus and reaffirmed its 7-9% long-term EPS CAGR target. SRE lagged amid worsening California regulatory concerns, including elevated bill pressures, wildfire liability risk, and less constructive gubernatorial candidates.

Sempra, one of our larger positions and a significant active weight versus the benchmark, saw double-digit gains in the quarter as it continued to regain investors’ confidence after resetting its 2025 earnings guidance earlier in the year. In addition, its recently announced sale of a 45% stake in Sempra Infrastructure Partners at an attractive valuation eliminates a need for equity raises to fund the company’s ambitious capital program in Texas. This announcement further advances Sempra’s strategy to focus on its regulated U.S. utilities and strengthens its overall financial position.

Sempra’s recent moves to focus on its regulated U.S. utilities businesses and strengthen its overall financial position spurred its shares higher. This strategic focus is expected to enhance its growth potential and stability, making it a favorable investment in the current market environment. The company’s commitment to its regulated utility operations aligns well with the demand for reliable energy sources, positioning Sempra as a strong player in the utilities sector.

Sempra has taken significant steps to simplify its business by selling a 45% interest in its infrastructure platform, which will help fund utility growth. Additionally, the company reached a final investment decision on its Port Arthur LNG Phase 2 project, indicating strong future prospects. Sempra has also affirmed its guidance at the high end or above the projected EPS CAGR of 7%-9% for 2025-2029, showcasing confidence in its growth trajectory.

Sempra has taken significant steps to simplify its business by selling a 45% interest in its infrastructure platform, which will fund utility growth. The company has also reached a final investment decision on its Port Arthur LNG Phase 2 project. Sempra affirmed its guidance at the high end or above the projected EPS CAGR of 7%-9% for 2025-2029, indicating strong growth potential in the coming years.

Sempra's 1Q earnings topped expectations, and the company guided to hitting the top end of its 7% to 9% long-term EPS growth target through 2029. This positive outlook is supported by improving momentum in Texas, indicating strong operational performance and growth potential. The manager's confidence in Sempra is reflected in their decision to increase their position, suggesting they see significant value and growth opportunities in the company moving forward.

Sempra's stock declined significantly after the company lowered its full-year guidance due to California regulators limiting a proposed rate increase, citing affordability concerns. This decision highlights the regulatory challenges that utilities face as they attempt to modernize their grids to support electrification and AI-driven energy demand. Despite these challenges, Sempra continues to invest in its Oncor subsidiary in Texas, where long-term electricity usage is expected to rise with ongoing data center development and population growth.

Despite facing challenges from wildfires and regulatory changes, we believe Sempra's long-term strategy of reallocating capital towards higher-growth markets like Texas is sound. The current valuation appears overly discounted for a company with defensive characteristics and a projected high-single-digit earnings growth. We remain confident that the protective legislation in California will mitigate long-term financial impacts, supporting our view that Sempra is well-positioned for future growth.

Sempra reduced guidance on lower returns in CA, and long-term growth rate of 6% to 8%. Sales growth, driven by data centers, could provide a tailwind for the company.