3 Stocks Plugged into the Renewable Energy Revolution

These companies are well-positioned for policy tailwinds and a shift to sustainable energy

Vikram Barhat 25 November, 2020 | 4:28AM
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Solar panels

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While the pandemic has wrought global economic devastation, it has also provided humanity the opportunity to hit the reset button and plan for sustainable ways to do things, particularly in the energy sector.

Fortunately, the world’s transitioning to clean energy was well underway. Globally, low-carbon energy production represents about 16% of total production, of which 11.4% from renewables, and 4.3% from nuclear. However, in terms of power generation, a large component of the energy mix, more than a third of global energy (36.7%) now comes from renewable sources. Similarly, renewable electricity generation in the U.S. now accounts for 17% of the total energy mix, per the U.S. Energy Information Administration (EIA). In fact, the U.S. energy consumption from renewable sources surpassed coal energy in 2019.

The trend creates a long-term growth tailwind for companies that are plugging into the renewable energy revolution. The following energy businesses are closely aligned with the global pivot to sustainable energy. They could further benefit from the Biden administration’s support for clean energy, which could accelerate decarbonization of energy production.

First Solar Inc
  Ticker FSLR
  Current yield: -
  Forward P/E: 22.52
  Price US$84.06
  Fair value: US$63
  Value 33% premium
  Moat None
  Moat Trend: Stable
  Star rating: **
Data as of Nov 20, 2020

The world’s largest thin-film solar module maker, First Solar (FSLR) makes utility-scale solar systems using the company’s photovoltaic solar modules. With production lines in Vietnam, Malaysia and Ohio, the firm is well-positioned to capitalize on the global transition to renewable energy.

“We continue to consider First Solar a high-quality option for investors who want to increase their U.S. renewable energy exposure,” says a Morningstar equity report, noting that the firm recently sharpened its focus on the U.S. “where state policies and corporate demand are quickly creating one of the world's most attractive solar markets.”

While solar is cost-competitive with other power generation sources, the firm’s operational efficiency, technological innovation and customer relationships will drive growth. “Solar module makers like First Solar differentiate themselves on cost and conversion efficiency--modules’ ability to turn sunlight into electricity,” says Morningstar sector strategist, Travis Miller, adding that “First Solar has long been a cost and efficiency leader with its thin-film panels.”

First Solar has been growing its focus on thin-film solar panel manufacturing, further consolidating its global market dominance. “We also think management is making a good strategic decision to focus on the U.S. utility-scale solar market and stay out of the hyper-competitive retail business,” says Miller, who recently raised the stock's fair value from US$61 to US$63, prompted by strong third-quarter results.

He cautions, though, the firm faces growing competition in the rapidly evolving renewable energy landscape. “Although First Solar has a leading solar panel technology and a bright near-term outlook, we don't have confidence it can sustain its near-term advantage over 10 or more years,” warns Miller.

NextEra Energy Inc
  Ticker NEE
  Current yield: 1.86%
  Forward P/E: 30.12
  Price US$75.13
  Fair value: US$68
  Value 10% premium
  Moat Narrow
  Moat Trend: Stable
  Star rating: **
Data as of Nov 20, 2020

A sustainable energy behemoth, NextEra Energy (NEE) distributes power to roughly 5 million customers in Florida. Florida Power & Light, its regulated utility, accounts for 60% of total earnings. The firm’s renewable energy segment generates and sells power throughout the U.S. and Canada.

“NextEra's high-quality regulated utility in Florida and a fast-growing renewable energy business give investors the best of both worlds: a secure dividend and industry-leading renewable energy growth potential,” says a Morningstar equity report.

NextEra's largest regulated utility, Florida Power & Light, is pushing to build 10 gigawatts of solar by 2030, which will increase solar to 20% of its energy mix. “Investors will earn an immediate return on those investments under automatic customer rate adjustments,” the report says.

NextEra Energy Resources, a subsidiary of NEE and a highly contracted energy business, is well-positioned to benefit from the secular growth trend of renewable energy. “NextEra has proven to be a best-in-class renewable energy operator and developer,” says Morningstar equity analyst, Andrew Bischof, who recently upped the stock's fair value from US$62.5 to US$68, “due to greater expectations for renewable energy development in our five-year forecast, additional regulated utility investment opportunities, [and] operating efficiencies.”

The firm’s long-term power sales contracts help reduce cash flow volatility and exposure to volatile commodity prices, he adds.

While the company’s full suite of businesses has a narrow moat, the renewable energy business boasts a sustainable competitive advantage, earning a wide moat. “This segment has secured some of the country's most desirable wind and solar generation sites, locking in 20-year-plus purchase power agreements with escalator clauses protecting returns,” asserts Bischof.

Evergy Inc
  Ticker: EVRG
  Current yield: 3.99%
  Forward P/E: 16.75
  Price: US$53.69
  Fair value: US$56
  Value: Fairly valued
  Moat: Narrow
  Moat trend: Stable
  Star rating: ***
Data as of Nov 20, 2020

A regulated electric utility, Evergy (EVRG) has a combined rate base of approximately US$14 billion, about half in Kansas and half split between Missouri and federal jurisdiction. It owns and operates 94% of the 1,200 MW Wolf Creek nuclear plant that supplies about 17% of the company's net generation or purchased power. Coal and natural gas generation accounts for about 60% of total sales but is declining as the company moves towards renewable energy, which currently accounts for about 27% of its power generation. Evergy is one of the largest wind energy suppliers in the U.S.

As part of its Sustainability Transformation Plan, Evergy is accelerating its transformation to a sustainable energy company by focusing on additional capital allocation to decarbonization and grid modernization. “The result is greener, more reliable and affordable energy for our customers, and enhanced earnings growth and value creation for Evergy’s shareholders,” said president and chief executive officer, Terry Bassham, in a recent statement.

The utility, which has set an ambitious decarbonization target of 80% reduction in CO2 by 2050, was formed by a merger between Great Plains Energy and Westar Energy. The merged entity created “a regulated utility with a solid balance sheet, significant investment opportunities in wind energy and transmission, and more flexibility to meet environmental requirements,” says Morningstar equity report.

The merger is projected by the company to have US$160 million per year in synergies by 2022. “We agree and believe Evergy is likely to meet or exceed management's cost savings target,” says Morningstar equity analyst, Charles Fishman, who puts the stock’s fair value at US$56.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Evergy Inc55.11 USD-0.95Rating
First Solar Inc197.59 USD1.53Rating
NextEra Energy Inc76.09 USD-0.42Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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