NextEra Energy: Clean Energy Leader Faces Challenges Amid Solid Fundamentals

NextEra Energy: Betting On The Right Clean Energy Leader (NYSE:NEE)

Looking for a helping hand in the market? Members of Ultimate Growth Investing get exclusive ideas and guidance to navigate any climate. Learn More " NextEra Energy (NYSE:NEE) investors are likely heading into NEE's Q2 earnings release on July 24 with higher uncertainty. NEE topped out in late May 2024 under the $80 level as investors likely took profit. NEE fell quickly toward its mid-June lows, just under the $70 level, before dip-buyers returned to support the stock. NEE has struggled to regain upward momentum as the market has likely started to price in the possible return of a second Trump administration. My last bullish NEE article underscores my belief that NEE is still early in its recovery process. Notwithstanding the recent volatility, NEE's growth prospects have remained intact, suggesting a dip-buying opportunity could be apt. New energy stocks have suffered a de-rating as investors reassessed the prospects of at least a "partial repeal" of the Inflation Reduction Act. However, a full repeal of the IRA is not anticipated. Accordingly, the credits allocated to "domestic manufacturing, nuclear power, and wind and solar tax credits are expected to enjoy bipartisan support." As a result, meaningful and well-supported dips in clean energy leaders like NEE are expected to attract growth and income investors. The Florida-based NEE has also assured investors that the campaign finance issues that plagued its Florida Power & Light Company are likely over. FPL is "the largest electric utility," underscoring its scale and criticality to NextEra Energy's business model. In Q1, FPL accounted for over 50% of NextEra Energy's GAAP net income, demonstrating its importance to NEE. In NEE's recent Investor Day in June, NextEra Energy indicated that it "plans to file a rate case in March" 2025, bolstering investor confidence in FPL's earnings prospects. Consequently, I've assessed that NEE's confidence in filing a rate case in the near term underscores a more favorable regulatory outlook for FPL. Therefore, it should mitigate the previous regulatory headwinds that buffeted NEE. A constructive regulatory outlook is pivotal in assuring investors that it can continue to earn above-average returns, as FPL is expected to invest "$34B to $37B" through 2027. NextEra Energy's scale in expanding the scale of FPL is predicated on the secular growth vectors in load growth in the long term. The localization of US manufacturing attributed to increased reshoring initiatives has led to a surge in construction spending. In addition, the ability to capitalize on the Permian Basin's robust supply dynamics has also boosted the growth prospects of the US oil and gas industries. The AI gold rush is also expected to spur an incredible 15% CAGR in data center electricity demand. Consequently, NEE seems well-positioned to capitalize on these opportunities, allowing it to invest further and scale its new energy portfolio. As seen above, NEE has raised its outlook for new renewables and storage projects to between 36.5 GW and 46.5 GW. I assess improved clarity provided by the earlier growth prospects, a discernible increase from its previous guidance of 32.7 GW to 41.8 GW. As a result, I have higher confidence that management is better positioned to meet its medium-term earnings outlook, supported by secular growth drivers across several industry verticals. Management's ability to deliver a multi-year adjusted earnings growth outlook through 2027 likely assures investors about NEE's renewable energy growth prospects. As a result, I believe it provides a firm foundation for investors to assess NEE's robust "A-" growth grade, underpinning NEE's premium valuation. NEE isn't assessed to be undervalued, although bullish investors might argue that its solid growth outlook justifies it. Furthermore, NEE's adjusted EBITDA multiple of 12.6x is still below its 10Y average of 13.9x. Hence, it's arguable that the market hasn't fully revalued NEE's secular growth opportunities, given the high interest rate environment and potential IRA partial repeal headwinds. Despite that, NEE's best-in-class "A+" momentum underpins my conviction in NEE's buying thesis, bolstering confidence in its solidly profitable business model. In addition, income investors should turn more constructive as they potentially rotate out of cash into leaders like NEE. Therefore, NEE's forward dividend yield of 2.7% should receive support from income investors reallocating their portfolios. Investors considering an investment in NEE must be mindful about not chasing NEE in sharp upward spikes, as seen in May. Given the inherent volatility assessed in NEE, buying on well-supported pullbacks seems to be a wiser decision. NEE holders must also consider the developments heading into the November presidential election. The market will likely attempt to price in the winner ahead of the results. Therefore, higher volatility must be anticipated if Trump's probability of winning increases further. In addition, I assess that the market has likely priced in a less hawkish Fed moving ahead. Given the high level of CapEx anticipated through 2027, unanticipated delays and reduced cadence in the Fed's interest rate cuts might curtail investor confidence in NEE. Rating: Maintain Buy. Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing, unless otherwise specified. Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn't? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

NextEra Energy: Fundamentals And Technicals Solid, But Shares Rally To Fair Value

I highlight key price levels to monitor ahead of earnings next week. NextEra Energy (NYSE:NEE) has benefitted from an overall rise in the Utilities sector over the past three months. The Utilities Select Sector SPDR ETF (XLU) is second only to the Information Technology ETF (XLK) since the middle of April. Solid earnings from the power-generation group helped back in the springtime, and key earnings from NEE are on tap next week. Since April, interest rates have fallen amid a bull steepener across the yield curve, which is likely a tailwind for the yield-sensitive Utilities sector. I am downgrading shares of NextEra from a buy to a hold, however. This is not a sudden bearish outlook on the biggest stock in XLU, but rather a call on valuation. What's more, NEE's technical situation is above a key spot on the chart that I detailed earlier this year, which is a positive sign. Utilities Post Big Returns Last 3 Months Back in April, NextEra reported a mixed set of quarterly results. Q1 non-GAAP EPS of $0.91 topped consensus expectations by $0.13, but revenue of $5.73 billion, down almost 15% from year-ago levels, was a significant $750 million miss compared to Wall Street estimates. The solid bottom-line beat came amid gains from new projects and existing customer revenue, offsetting volatility in the interest rate market and a continued muddled trend in the renewables market. Florida Power & Light saw a healthy profit jump, and NextEra Energy Resources contributed $0.40 to EPS. The management team reaffirmed its 2024 EPS guidance to be in the range of $3.23 to $3.43 with a long-term EPS target range of 6% to 8% growth. The company also aims to increase its dividend by 10% annually through 2026. It was the 17th consecutive quarter of NEE beating earnings estimates, and shares traded higher by 1.4% in the following session. Looking ahead to next week's earnings report, analysts anticipate $0.98 of non-GAAP per-share earnings, which would be above last year's $0.88 figure. The options market has priced in a near-average 3.9% earnings-related stock price swing when analyzing the straddle pricing today. Then at its Investor Day in June, the tone was rather upbeat. The firm detailed its robust financial position and plans for tech-centered investments. But many of these investments may not be all that earnings accretive for many quarters. NextEra also highlighted capital funding plans in the range of $97 to $107 billion, which will come from a mix of debt, equity, and asset recycling. Overall, everything appears on track with NEE, and lower interest rates today are certainly a boon. But key risks include an uncertain regulatory backdrop ahead of US elections, heightened risk around natural disasters this year in particular, given hurricane season forecasts, volatility in the commodity markets, namely with natural gas, and a renewables market that remains risky following boom years looking back. On the earnings outlook, analysts at BofA see operating EPS increasing 9% this year and continuing near that clip through the out year and 2026, resulting in perhaps more than $4 of per-share earnings two and a half years from now. The current Seeking Alpha consensus numbers are about on par with what BofA sees, while sales are expected to decline modestly this year before rising better than 9% next year. Dividends, meanwhile, are forecast to increase to above $2 this year given the rate of increase detailed earlier, while NEE's EV/EBITDA multiple is now close to that of the broader market. Being a capital-intensive utility, free cash flow is negative, so that's not a major red flat here. NextEra: Earnings, Valuation, Dividend Yield Forecasts I think the fundamentals with NEE are just fine today, but shares have rallied 20% since my previous outlook as the sector stabilizes and catches some AI intrigue. If we assume $3.55 of non-GAAP EPS over the next 12 months and apply the stock's five-year average earnings multiple of 21.8, then shares should trade near $76. While that is a nice bump up from my earlier valuation this year, it is right near where the $156 billion market cap company trades today, making it a hold. NextEra: P/E and PEG Ratio Now Close to the LTA Compared to its peers, NextEra has a soft valuation rating while its growth trajectory is quite healthy. With likewise strong profitability trends and a high 2.7% forward dividend yield, there are certainly quality characteristics of the Florida-based company. Moreover, share-price momentum is sound despite a mixed picture when it comes to sellside EPS revisions in the past 90 days. Competitor Analysis Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2024 earnings date of Wednesday, July 24 BMO with a conference call later that morning. You can listen live here. No other volatility catalysts are seen on the calendar. Corporate Event Risk Calendar The Technical Take With a fair valuation and solid execution by NextEra's management team, NEE's technical situation is generally attractive. Notice in the chart below that shares have rallied through the key $70 mark that I have been discussing over the past year with this stock. Now, about that point of polarity, the next layer of potential selling pressure likely comes into play in the $80 to $82 range - that's the high from last quarter and where the bulls and bears battled from late 2022 through the middle part of last year. Also take a look at the RSI momentum oscillator at the top of the graph - it reached overbought conditions in May shortly before the stock price hit its YTD high. After a successful test of the $70 area, the stock has bounced back big. Furthermore, the long-term 200-day moving average is now rising, suggesting that the bulls have grabbed control of the primary trend. I also like that the bears were unable to take the stock down to a gap level in the upper $50s in late Q1. Overall, support is near $70 with $82 being resistance. NEE: Shares Rally Through Long-Term Resistance The Bottom Line I have a hold rating on NextEra. The company is executing well and there are some macro tailwinds, but its valuation is simply at a fair level right now. 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