We applaud the big climate-changing ideas of NextEra Energy. They emphasize clean energy, solar, and wind. Fantastic for the world.
Currently, many analysts and financial journalists sing NextEra's praises. It has been almost unanimously touted as one of the best utility stocks, whether the author is writing about the best five or the best ten utility stocks. Interestingly, many hedge funds own NextEra energy.
Why NextEra stock is floating on Cloud Nine, let us examine.
Business Overview
NextEra Energy, a Florida-based company, is one of the long-time leaders in the renewable energy industry. The company has two key businesses: Florida Power & Light Company and NextEra Energy Resources, LLC.
Anticipated growth of Florida Power
Florida Power is one of the largest electric utilities not only in the state of Florida but also in the U.S. This electric power leader focuses on investing in the generation, transmission, and distribution facilities. It provides its customers with the value proposition of low customer bills, high reliability, exceptional customer service, and clean energy solutions. For the eighth time in eight years, FPL has been acknowledged as the most reliable electric utility in the country.
As per NextEra Energy's Q4 2022 earnings report, the continued investment in the business drove FPL's growth for the entire year. The average number of customers at FPL increased by about 74,000 compared to the same quarter the previous year in the fourth quarter of 2022. FPL effectively implemented its strategic plans in 2022 while providing an excellent customer value proposition. Moreover, FPL installed about 450 MW of cost-effective solar in service in 2022. In addition to solar, Okeechobee Clean Energy Center's green hydrogen pilot project by FPL is still on pace and getting closer to its anticipated commercial operating date later this year.
NextEra Energy Resources expanding its base
NextEra Energy Resources is the largest generator of wind and solar energy and the most prominent leader in battery storage globally. It focuses on developing, constructing, and operating long-term contracted assets throughout the U.S. and Canada.
These two subsidiaries work collaboratively to achieve the objective of lowering costs and creating efficiencies for their businesses. They also assist the company in producing clean, zero-emission electricity from seven commercial nuclear power plants in Florida, New Hampshire, and Wisconsin.
NextEra Energy Resources have initiated approximately 1,700 MW of renewable energy and storage projects since the third-quarter 2022 financial results. These projects include roughly 300 MW of wind, 730 MW of solar, and 670 MW of battery storage.
As per its Q4 2022 results, Florida Power's net income rose from $3.20 billion in F.Y. 2021 to $3.7 billion in F.Y. 2022. This growth was primarily driven by continued investment in the business. NextEra Energy reported a net income on a GAAP basis of $4.155 billion, compared to $3.57 billion in F.Y. 2021. Further, its adjusted earnings were $5.74 billion in F.Y. 2022, compared to $5.02 billion in F.Y. 2021.
Experienced Leadership
NextEra Energy is headed by Mr. John W. Ketchum, who has served as the CEO (Chief Executive Officer) since March 2022. He has worked closely with the ex-CEO, Mr. Jim Robo, who currently serves as chairman of the company. Under the leadership of Mr. John W. Ketchum, the company has targeted actual zero carbon emissions by no later than 2045, and this step has made history in the company's record.
NextEra Competing Heads-on
Having the most significant market capitalization within the sector, NextEra Energy has been highly competitive with its peers.
Duke Energy (NYSE:DUK), one of its biggest competitors, has 8.2 million retail electric customers and distributes natural gas to 1.6 million customers, per Duke's investor update dated November 16, 2022. Whereas, as per NextEra Energy Q4 2022 earnings report, they have been providing electricity to more than 5.8 million customer accounts supporting more than 12 million residents. Its other peer, Southern Co (NYSE:SO), has been serving around 9 million customers, says the company's report.
The net generating capacity of NextEra Energy for F.Y. 2021 and Duke Energy was 28,450 MW and 50,000 MW, respectively. Southern Co has 43,000 MWs of nameplate capacity.
Further, Dominion Energy (NYSE:D) and American Electric Power Company (NAS:AEP) have an electricity generating capacity of 30.2 GW, serving nearly 7 million customers as per its 2021 annual report, and a capacity of 26,000 MW serving 5.5 million customers as per the company website respectively.
If we talk about renewable energy, NextEra Energy faces intense competition from Enel SpA (MIL:ENEL, Financial), which operates worldwide. It has a 75.9 million customer base and 92.7 GW of total installed capacity, which includes 55.6 GW of renewables, according to the Q3 2022 operating data.
On High Growth Trajectory
NextEra Energy Resources had a terrific performance in F.Y. 2022. They signed 8,000 MW of new projects over the year. Since the Q3 call, they have originated approximately 1,700 MW of renewables and storage projects. This includes 300 MW of wind, 730 MW of solar, and 670 MW of battery storage projects per the Q4 call. The net backlog now stands at 19,000 MW, and the significant net additions provide strong visibility for growth.
The company believes that their development expectations for wind, solar, and storage are roughly 33 G.W. to 42 G.W. over the four years from 2023 through the end of 2026. The breakup for the same is as below from Q4 2022 PPT.
Target “Real Zero”
In June 2022, NextEra Energy announced the carbon emissions-reduction goal "Real Zero," which commits to eliminating carbon emissions from its operations by no later than 2045 in its report. Under this Real Zero goal, the company would improve that carbon emissions reduction rate to 82% by 2030, 87% by 2035, and 94% by 2040 before striving to achieve its goal. The June 2022 Investor Conference presentation depicts each source's milestones.
FPL plans to reach its interim targets by modernization of its generation fleet in Florida, and this will comprise a diverse mix of solar, battery storage, existing nuclear, green hydrogen, and other renewable sources. They plan this across all its operations at zero incremental cost for its customers, keeping FPL customer bills the lowest in the country.
But valuations are running high
As per data provided by GuruFocus, NextEra Energy's P.E. Ratio is 36.18, which is higher than the Utilities - Regulated Industry's average of 16.73. NextEra Energy's Book Value per Share (BVPS) stood at $18.95 last year. During the past five years, NextEra's BVPS has grown by an average of 4.50% per year. As of February 2, 2023, NextEra Energy's Dividend Yield is 2.25%.
NextEra Energy's enterprise-value-to-EBITDA ratio stands at 22.57x, while its enterprise-value-to-revenue ratio yields 10.08x, above the industry median of 2.36x. These high valuations are mainly due to a sharp surge in NextEra Energy's Price, which has risen by 36.57% since 2017. The surge in price is relatively higher than other companies in the same Industry.
Financials Seems Stretched
NextEra Energy has excellent growth plans in place. Its ambitious "Real Zero" carbon campaign will lead to a decisive change in its business model.
But the growth has been weighing on the company's balance sheet. In Q4 2022, NextEra had almost $55 billion of long-term debt. Plus, another $10 billion is in the current liability section in the form of commercial paper, short-term debt, and the current portion of long-term debt. Relatively, the company held only $1.6 billion of cash and equivalents. This is not a great scenario.
This huge debt load creates a considerable interest expense, which can pressure the company's financials. As per GuruFocus, the company's interest coverage ratio stands at 2.51x.
Further, the growth plans and targets warrant more investment and capital expenditure. Will the company generate enough cash flows to meet these requirements?
While about 15 analysts recommend Nextera Energy's stock (NEE, Financial), we declare that the lights are out at NextEra, no NextEra does a fantastic job in their business, but Investors are grossly overvaluing it.
We do not recommend buying. Why?
As per the data on the website, look at the company's operating cash flow and CAPEX in the following graph.
Growth of Operating Cash Flow and CapEx
Yes, the Cash flow on Operation increases, but CAPEX increases more.
No wonder the company does not generate free cash flow.
Still, the company continues to pay dividends besides paying interest payments. No wonder the company's debt keeps increasing.
NextEra Energy (NYSE:NEE) Health & Balance Sheet - Simply Wall St
How long will the company's dividend yield of 2.25% (as of February 2, 2023) continue to satisfy investors while the U.S. treasury 10 yrs pays 3.39%? The company boasts valuation ratios like a Silicon Valley start-up company.
Price to Sales Ratio: 7.16
EV over Sales: 10.08
Hurricanes in Florida can damage the company's property considerably. The company invests so much in renewable energy, but we do not precisely know how much maintenance Capex is required to keep up the solar panels and wind turbines. Most financial media doubt companies' heavy investment in renewable energy, but if the investment does not produce an adequate return, the company's economic profit becomes negative. Will Florida continue to grow at a brisk rate?
How will the regular agency react to the request to increase the rate in Florida if the recession grips the country? Did you miss the compensation package for the management?
Source: Simply Wall St.
We believe in the company’s progressive ideals promoting sustainability, but the free cash flow has to justify the stock price.
Considering all those factors, we have shorted the stock.
Overall
We appreciate the company's efforts to move towards cleaner energy. Also, its business model mix will positively impact the environment and likely increase the company's earnings and cash flows in the future.
But the company's high growth trajectory comes with a stretched balance sheet. Also, valuations have been running high, and a high debt load plus lofty valuations might prove to be roadblocks for NextEra to become an ideal investment case.
Will Warren Buffett (Trades, Portfolio) own this stock or buy the company outright? Will humble, great investor Sir Templeton short the stock? Will Peter Lynch buy the stock? These are questions that investors need to ponder.
Disclaimer/Disclosure
We have a short position in the shares of NextEra Energy, either through stock ownership, options, or other derivatives. We wrote this article to express our opinions and are not receiving compensation from any individual or entity.
It would be best if you did not treat any opinion expressed in this article as a specific inducement to make a particular investment or follow a particular strategy but only as an expression of our opinion. This is not investment advice. Before you invest in anything you might read in our articles or other people offering investment advice online, do your research to verify the soundness of what you have read. Please consult your investment advisor before making any decisions.
