On Friday, Goldman Sachs (NYSE:GS) made a significant adjustment to the stock rating of EDP Renovaveis SA (EDPR:LI) (OTC: EDRVF), elevating it from Neutral to Buy. The investment firm has set a new price target of EUR 17.50 for the company's shares. The upgrade came despite recent weak earnings momentum, which the analyst believes has led to a reset of expectations for the company's performance extending beyond 2024.
The rationale behind the upgrade to Buy is threefold. Firstly, the recently issued guidance by EDP Renovaveis, which was seen as disappointing, is thought to have sufficiently adjusted market expectations. Secondly, the downgrade in earnings projections for 2024 is considered to be due to temporary factors that are expected to normalize in the future. Lastly, the current trading price of the stock is below Goldman Sachs' valuation of the company's existing assets, which suggests that the market is undervaluing the potential for future growth.
Goldman Sachs has based its new price target on a combination of valuations. One-fourth of the price target is derived from the valuation of existing assets, while the remaining three-fourths are calculated using a discounted cash flow-sum of the parts (DCF-SOTP) analysis.
This analysis takes into account ten years of projected additions to the company's assets, with an implied internal rate of return (IRR) of approximately 200 basis points above the weighted average cost of capital (WACC).
The new price target of EUR 17.50 implies a considerable upside of around 40 percent from the current trading levels. This optimistic forecast by Goldman Sachs suggests a strong potential for investors in the shares of EDP Renovaveis, taking into account both the current valuation of existing assets and the expected contributions from future growth.
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