By Alex Kimani
The energy sector has been one of the hardest hit by the Covid-19 pandemic, mostly due to widespread lockdowns and the resultant collapse in fuel demand. However, one corner of the energy market has actually been thriving: Clean energy. The sector’s favorite benchmark, iShares Global Clean Energy ETF (ICLN), has returned 124% YTD vs. 24% by the S&P 500. Those impressive returns appear well-deserved, though.
The International Energy Agency’s (IEA) 2020 Outlook points to the highest-ever share of newly built generation capacity for renewables. According to the energy watchdog, 200 gigawatts of renewable power have been added in the current year, with renewables expected to account for 95% of the net increase in global power capacity through 2025. The agency has projected that installed wind and solar capacity will surpass natural gas and coal in 2023 and 2024, respectively.
That said, one renewable energy entity has been on a winning streak that stretches back long before Covid-19 reared its ugly head: NextEra Energy Inc. (NYSE:NEE).
A leading electric utility and renewable energy giant, NextEra has easily outperformed the market, with NEE Shares having returned 27% and 20% annually over the past five and 10 years, respectively. That’s way better than 14% and 13% per year for the S&P 500, and 12% and 11% by the Dow Jones.
NextEra is America’s leading producer of wind and solar energy, with about 30% of its energy portfolio coming from renewables. The shares are incredibly popular on Wall Street, with NEE stock included in 59 stock indices and owned by 2,736 institutions.
Unfortunately, being highly visible has left NEE overvalued, with a stratospheric valuation of nearly 32x expected next 12 months earnings, or roughly twice the S&P 500 Sector Utilities Index. Further, rapidly swelling debt burden thanks to unpaid bills due to Covid-19 could leave the likes of NextEra in a profit hole for years.
With such a rich valuation coupled with the bad debt overhang, here are three renewable energy stocks that could be better bargains than NextEra.
#1. Algonquin Power & Utilities
Algonquin Power & Utilities Corp. (NYSE:AQN) owns and operates a portfolio of regulated and non-regulated generation, distribution, and transmission utility assets in the United States and Canada. Algonquin controls 3 gigawatts of contracted renewable energy and serves 2.7 million regulated electric, water and natural gas utilities customers. While those numbers pale in comparison to NextEra’s, which will bring 3.2 GW of new renewable energy storage into service in 2020 alone, Algonquin’s fairer valuation is a key attraction.
Indeed, Algonquin’s valuation of 20x expected next 12 months earnings is one third less than NEE’s while its dividend yield of close to 4% is twice NextEra’s, despite the two companies having a very similar annual payout growth rate of 10%.
Further, Algonquin’s yieldco Atlantica Yield (NASDAQ:AY) will pay Algonquin $20 million when the plants begin operating in mid-2021, thus boosting its bottom line while freeing up capital for Algonquin. It’s the kind of deal that’s made NextEra Energy Partners (NYSE:NEP) an invaluable member of the NextEra family.
#2. Bloom Energy
Bloom Energy Corp. (NASDAQ:BE) is a clean energy company that designs, manufactures, and sells solid-oxide fuel cell systems for on-site power generation. Its key product, the Bloom Energy Server, is a stationary power generation platform that converts standard low-pressure natural gas, biogas, or hydrogen into electricity through an electrochemical process without combustion.
However, back in June, Bloom Energy announced that it’s entering the commercial hydrogen market by introducing hydrogen-powered fuel cells and electrolyzers that produce renewable hydrogen. Its timing could not have been better, with the hydrogen sector on the verge of taking off and costs expected to fall dramatically.
The Green Hydrogen Catapult Initiative is a brainchild of founding partners Saudi clean energy group ACWA Power, Australian project developer CWP Renewables, European energy giants Iberdrola and Ørsted, Chinese wind turbine manufacturer Envision, Italian gas group Snam, and Yara, a Norwegian fertilizer producers. The companies hope to drive 25GW of green hydrogen production by 2026, a scale that could significantly drive down hydrogen costs to below $2/kg thus making the fuel source competitive with fossil fuels in power generation. Green hydrogen is produced using renewables as an energy source in the electrolysis of water.
Its late entry into the hydrogen market might allow BE to ride the hydrogen wave at a profitable phase compared to legacy companies that have endured losses for much longer.
First Solar (NASDAQ:FSLR) is America’s largest solar manufacturer in America and the third-largest in the world with revenue (TTM) of $3.1 billion. First Solar manufactures solar panels, photovoltaic power plants, and related services, including construction, maintenance, and recycling of solar products. The Tempe, Arizona-based company employs thin-film semiconductor technology to achieve enhanced efficiency and sustainability in its solar modules.
FirstSolar has been removed from Goldman Sachs; Conviction List mainly due to lower exposure to fast-growing solar markets in China, India, and Asia(75% of the company’s orders come from the United States). Others like Raymond James have moved to the sidelines on fears that First Solar might come under pressure if Biden repeals Section 201 tariffs that Trump placed on imported solar modules from China, while Morgan Stanley and J.P. Morgan have downgraded the stock after its recent run-up to multiyear highs (FSLR is up 67.2% YTD).
Nevertheless, FSLR remains a top player in the industry and fundamentally sound. During the latest earnings, the company reported Q3 revenue of $928M (+69.7% Y/Y) and GAAP EPS of $1.45, both metrics easily beating Wall Street expectations.
More importantly, FSLR has a stronger balance sheet than most of its peers, with an impressive current ratio of 3.66 compared to 1.04 by JinkoSolar (NYSE:JKS), 1.14 by Canadian Solar (NASDAQ:CSIQ) and 0.47 for Daqo New Energy (NYSE:DQ).