In these days of over-indexation and overwrought algorithmic trading, the strongest players of a sector often soar and crash along with its weakest, depending on the latest investment fad. The silver lining: We now have an historic opportunity to buy stocks of high quality renewable energy adopters at very low prices.
A year ago, the opportunity was all on the sell side. The surprise victory of a pair of Democrats in Georgia’s US Senate elections pushed “green” ETFs to new heights, and prices of successful adopters like NextEra Energy (NEE) up along with them. We took the opportunity to recommend Conrad’s Utility Investor members pare down their positions in a half dozen then over-extended stocks.
Now, we’re in a place that’s 180 degrees opposite. The S&P Global Clean Energy Index has lost nearly half its value over the past year, including nearly 25 percent since I panned it in the October 23 Income Insights.
We had yet another chance to book some profits in NextEra Energy in late December, when shares moved above my “Consider Taking Profits” target of 90. And so far in 2022, the stock is down around 20 percent, to its lowest earnings multiple in several years.
Ironically, the company this week announced its best Q4 results ever, capping a record year at both the regulated utility (earnings up 10.9 percent) and the unregulated Energy Resources unit (up 13.1 percent). Management also raised the mid-point for 2022 earnings guidance to $2.80 per share from the previous $2.65, and the mid-point for 2023 to $3.055 per share from $2.87. And the long-term annual earnings growth target of 6 to 8 percent extended through 2025.
An aerial view of large windmills on green hills.
getty
The primary driver of growth is NextEra’s accelerating deployment of wind and solar generation systems. The Florida utility unit will achieve its 2030 target of installing 30 million solar panels five years ahead of schedule, generating $2.5 billion in fuel cost savings. And with a long-term rate deal with state regulators in hand, there’s 4.8 gigawatts of approved solar development in progress, as well as battery systems like the 409 megawatt Manatee Energy Storage Center started up in December.
During 2021, Energy Resources added 7.2 GW of new wind, solar and energy storage projects to backlog, which has grown at a 20 percent compound annual rate since 2017. It brought 3.8 GW into service, and pre-contracted 80 percent of capacity additions needed to reach the mid-point of its 2024 deployment target. Earnings from its unregulated transmission line unit rose 20 percent on the strength of opportunistic asset additions.
Before NextEra announced results, some analysts were forecasting a slowdown in US renewable energy deployment. Reasons cited included supply chain issues, surging commodity prices, labor shortages and rising interest rates, which together would squeeze margins and reduce the appeal of new projects to both utility regulators and corporate customers.
Fueling that fire was Dominion Energy’s (NYSE: D) early November announcement that its 2.6 gigawatt capacity Coastal Virginia offshore wind facility will cost $9.8 billion when it enters service in 2026, up from the initial estimate of roughly $8 billion. The project’s levelized cost of energy is now largely locked in by contracts. And it’s still just $87 per megawatt hour, well within previous guidance of $80 to $90. Virginia regulators have approved the spending in the Triennial Rate Review. And the company has clarified the rate impact of its entire green energy shift as just 2 percent average annual bill increases over 15 years.
That limits Dominion’s financial risk. But its cost increase has understandably raised fears other offshore wind developers will disclose higher costs with their Q4 results. That includes Avangrid Inc (AGR), its 81.52 percent owner Iberdrola SA (IBE, IBDRY) and partner ORSTED A/S (ORSTED, DNNGY). And the fear has spread even to onshore wind and solar developers like NextEra and Enel SpA (ENEL, ENLAY), whose projects are far less susceptible to cost increases because they’re typically contracted, sited, permitted, financed and built within 12 to 18 months.
My number one takeaway from NextEra’s Q4 results and guidance: There’s zero evidence of margin erosion from cost inflation in its renewable energy development pipeline. Nor is there any sign whatsoever of a waning appetite for new projects from current and potential customers.
During the company’s earnings call, NextEra’s outgoing CEO Jim Robo stated he’s “optimistic” the renewable energy component of President Biden’s “Build Back Better” legislation will eventually pass. But he also affirmed it would only be “an accelerator” for growth, and not “something we would need to deliver” on guidance.
Mr. Robo led the team that transformed NextEra from a well-run but slow moving south Florida utility into the world’s largest producer of wind and solar energy. And I believe he’s a major reason why US utilities have become big-time beneficiaries of the ongoing global energy transition, instead of its victims.
It’s hardly surprising that NextEra shares would sell off following Mr. Robo’s retirement news. But the numbers and guidance simultaneously announced by the utility are an unmistakable testament to the strength of the company he’s leaving behind. And that includes a very deep management bench to keep it on its very profitable path.
That’s the best possible reason to snap up NextEra’s suddenly cheap shares, while they trade well below my highest recommended entry point of 80. That also goes for the company’s yieldco affiliate NextEra Energy Partners (NEP), which also announced strong Q4 results. Partners also raised its dividend 3.2 percent sequentially from last quarter, pushing its payout 15 percent above the year ago rate.
To find out more about the best bargains in top quality renewable energy stocks, stay tuned for the February issue of Conrad’s Utility Investor. And click on the link below to find out more about my e-book:
