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Proprietary Data Insights Financial Pros’ Top Electric Utility Stock Searches in the Last Month
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Financial Pros Are Clear: Steer Clear of NextEra Energy |
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When financial pros start looking into your company, it should be for the right reasons. Yet, our data shows NextEra’s pulling eyeballs because institutional money is worried about the company’s future. Debt keeps growing. It’s subsidiary growth engine shut off. And its dividend yield isn’t all that attractive. Frankly, we weren’t impressed, even with the ridiculous revenue growth. Why? Because we don’t believe it’s sustainable. NextEra Energy’s Business NextEra Energy, Inc. (NEE) is THE premier player in the clean energy field as the largest electric utility in the United States by retail MWh sales and number of customers and the world leader in electricity generated from the wind and sun as well as battery storage. NextEra Energy is like the Swiss Army knife of power companies. It generates, transmits, distributes, and sells electric power to retail and wholesale customers across North America. With a diverse fuel mix up its sleeve and an impressive generating capacity of 58 GW, NextEra plans to invest heavily in renewable energy where it sees enormous growth potential.
Source: NextEra Investor Relations Sept. 2023 NextEra Energy segments its business into the following areas:
The company’s been making headlines for its aggressive push into renewable energy, which seems to be paying off. However, analysts are monitoring the potential risks of the transition to renewables.
Source: NextEra Investor Relations Sept. 2023 While the company forecasts steady growth for the rest of the year, largely driven by its continued investment in renewable energy infrastructure, there are signs of an economic slowdown. Still, management kept their long-term 6%-8% growth outlook through 2025. Of note – NextEra Energy owns 100% of the general partner in NextEra Energy Partners (NEP) and 13.8% in the limited partner interest. NEP owns, acquires, and manages renewable energy projects, paying significantly higher dividends. However, the higher financing costs forced NEP to cut its dividend. NEP has roughly $4.6 billion in convertible equity debt it needs to pay off in the next few years. Its current plans only deal with around $2.6 billion. Many assume NEE will come in to buy out the rest. Financials
Source: Stock Analysis As the largest electric utility in Florida, NextEra benefits from the state’s above-average population growth. Unlike most electric utilities that are lucky to grow revenues in the low single digits, NextEra achieved 10%-12% annually over the last 3-5 years. Although gross margins contracted after the pandemic, they’ve returned to their previous levels. At the same time, operating and profit margins are the highest they’ve ever been. However, heavy capital expenditures in the last few years ate up all their cash flow and then some. Where has all that money gone? A variety of projects that management plans to recoup as follows: Source: NextEra Investor Relations Sept. 2023 There’s also the hefty $4-$5 billion per year the company contributes to the nuclear decommission trust, which eats up more than half the operating cash flow. In fact, we show the company with negative free cash flow all the way back to 2015. Unsurprisingly, the corporate debt grew from $26.7 billion to $61.0 billion during that same period, costing them 3.12% overall. And the looming financing problems for NEP add another layer of complexity. Valuation
Source: Seeking Alpha Many utility stocks trade at historically elevated valuations. NEE is no exception. At 13.4x operating cash flow its the most expensive of the group. Even the 14.2x forward P/E ratio, as the lowest of its peers, still seems pretty darn high. Growth
Source: Seeking Alpha NEE has done a great job pushing revenues higher. That may be in jeopardy as NEP, a key growth engine, lowered its own outlook, citing higher financing costs. This leads us to believe the forward revenue growth for NEE is overstated. Profitability
Source: Seeking Alpha One thing NEE can claim are fantastic margins. It’s got the highest gross, EBIT, and EBTIDA margins of its peers. And none of them generate positive free cash flow. However, Duke Energy (DUK) achieved it only a few years ago and Constellation Energy Group (CEG) has generated free cash flow almost every year over the past decade.
Our Opinion 2/10 We can’t recommend NextEra Energy for several reasons. First, the complexity with its relationship to NEP muddies the financial waters. Second, the debt keeps rising with no free-cash-flow in site. Third, and most importantly, the 3.43% dividend yield, funded by debt, is nearly 1.5% below the current Treasury rate. Why buy a company that’s got a growing debt problem when you can get a better return on risk-free government debt? |
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