Summer's coming, on with the aircon, how about some electricity stocks too?
Key Stats for NextEra Energy Inc
| Ticker | NEE |
|---|---|
| Sector | Utilities |
| Latest price | $138.35 |
| Value | $64,770M |
| Daily vol | $236M |
| Date | 23 May 2017 |
| Links | Yahoo Finance, SEC Edgar, nexteraenergy.com |
1. What's NEE do?
It's pretty simple, NextEra Energy is an electric power company. Its segments include
- Florida Power & Light Company: a rate-regulated electric utility engaged primarily in the generation, transmission, distribution and sale of electric energy in Florida. They've over 5m clients!
- NEER: a diversified clean energy company with a business strategy that emphasizes the development, acquisition and operation of long-term contracted assets with a focus on renewable projects. NEER owns, develops, constructs, manages and operates electric generation facilities in wholesale energy markets.
So, is it dirty power going green? Let's look at the stats, they are responsible for
- 16% of the installed base of U.S. wind power production capacity
- 11% of the installed base of U.S. universal solar power production capacity; *8 nuclear power stations, representing approximately 6% of U.S. nuclear power electric generating capacity.
Overall, 98% of their power comes from renewable, nuclear and natural gas and is significantly lower rates of emissions of CO2, SO2 and NOx than the average rates of the U.S. electric.
Sounds like a thumbs up, to me.
But does good business pay?
Clearly it's not doing the bottom line any harm. And as for the yoyoing top-line, well there revenues & costs go up and down with energy prices, which mostly comes out in the wash.
| Metric | 2016A | 2015A | 2014A | 2013A | 2012A |
|---|---|---|---|---|---|
| Revenue | $16.2bn | $17.5bn | $17.0bn | $15.1bn | $14.3bn |
| EPS | $6.25 | $6.06 | $5.60 | $4.47 | $4.56 |
| DPS | $3.48 | $3.08 | $2.90 | $2.64 | $2.40 |
But the income statement is missing a key part of the story. For once, let's dig into the cashflow statement:
| Metric | 2016A | 2015A | 2014A |
|---|---|---|---|
| Operational cashflow | $6.3bn | $6.1bn | $5.5bn |
| Capex: utility & generation | $9.3bn | $7.9bn | $6.7bn |
We can see that they are on an major investment drive. So it won't be a surprise that their asset base is going up up up, as is their debt level. In fact with $33,264M of net debt, that is 4.3x it's latest operating profit.
If this wasn't a utility I'd be worried, but it's remarkable how much debt you can load onto these biz. Plus the utility industry has a weird dynamic, in that it's regulated. In the US the greater your regulated asset base the more money you make. As you are allowed a return on the regulated asset base.
On the recent quarterly results they highlighted that they are making a regulated return at the top of their allowed range and that they expect to grow their regulated capital base by 8% per annum into the future.
I suppose we shouldn't discourage investment in critical infrastructure!
And despite being investment heavy the expectation is that they ramp the EPS and dividend this year, with earnings forecast to jump to $6.68 up 7% a share and the divie to grow 9% to $3.91. Nice!
2. But how does it fare versus the competition
Margins are excellent and returns are top of the class.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| NextEra Energy Inc | $16,292M | 48% | 16% |
| Duke Energy Corp | $22,850M | 41% | 6% |
| Dominion Energy Inc | $12,200M | 48% | 16% |
| Southern Co | $21,675M | 40% | 11% |
| American Electric Power Company Inc | $16,269M | 33% | 4% |
| PG&E Corporation | $17,960M | 32% | 11% |
| Exelon Corporation | $32,543M | 30% | 7% |
And when it comes to valuation, we can see these superior figures boosting both $NEE and $D. Both trading in the low 20s.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| NEE | $64,770M | 21x | 6% | 3% | 14% |
| DUK | $58,860M | 18x | 3% | 4% | 15% |
| D | $50,130M | 22x | 4% | 4% | 12% |
| SO | $49,771M | 17x | 4% | 5% | 16% |
| AEP | $34,135M | 19x | 2% | 3% | 11% |
| PCG | $33,665M | 18x | 4% | 3% | 17% |
| EXC | $32,904M | 13x | 2% | 4% | 14% |
3. What's Wall Street thinks?
From a sentiment perspective, trading at 21x forward earnings is toppy for NEE. It's traded between 17 and 21 times over the last year.
No wonder the consensus price target from Wall Street at $143 is only 3% above the current price. So hardly that attractive. Though we should note they have a Buy recommendation. Perhaps that's their super-long-term view!
4. Switched on?
Seems like this is a really well honed business. Management's investing for the future, but not at the expense of capital returns to shareholders. If you believe corporate tax rates in the US can change, surely that'll provide an added benefit for companies on high rates in the utilities sector like NEE.
If I didn't have any utilities in my portfolio, I'd be tempted by NEE and D as quality plays. But it feels like the easy money's been had. Apologies for the hindsight!
For now, I'll pass.
Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
View the archive of Stock a Day posts at r/stockaday.
Author notes: u/shane_stockflare is a Chartered Financial Analyst.
Submitted May 23, 2017 at 11:15AM by shane_stockflare http://ift.tt/2rPoY7E
