NextEra Energy: Stability Amid Chaos

Summary:

• NextEra Energy combines dividend stability with industry-leading renewable energy growth potential.
• Regulatory uncertainty and supply chain diversification are critical factors for investors to monitor.
• Attractive valuation and the growing green energy trend position NEE for potential outperformance.

NextEra Energy (NYSE:NEE) offers a compelling investment opportunity, combining the stability of a secure dividend from its high-quality regulated utility, Florida Power & Light (FP&L), with the industry-leading growth potential of its renewable energy business, NextEra Energy Resources. As we approach NEE’s upcoming earnings, it is essential for investors to consider various aspects of the company’s operations, ranging from regulatory environments to management changes and supply chain diversification. In this article, we will delve deeper into these factors and present our investment thesis based on our research and analysis.

Analysis of Opportunities and Risks Heading Into Earnings

NextEra Energy provides investors with a unique investment opportunity, blending the stability of a secure dividend from its high-quality regulated utility in Florida, Florida Power & Light (FP&L), with the industry-leading growth potential of its renewable energy business, NextEra Energy Resources. As we approach NEE’s upcoming earnings, investors should consider several key aspects of the company’s business.

FP&L is well-positioned to benefit from Florida’s constructive regulatory environment, which enables high allowed returns, minimal regulatory lag, and low customer rates. The utility is planning (page 30) to invest more than $40 billion through 2027, which is expected to support a 9% rate base growth. Growth opportunities include continued solar generation buildout, storm-hardening investments, and transmission and distribution infrastructure development. However, increased regulatory uncertainty due to allegations of federal and state campaign finance violations could pose a challenge. Although the company’s internal review has indicated that it would not be liable for any violations, the recent retirement of FP&L’s longtime President and CEO raises further questions.

NextEra Energy Resources has emerged as a best-in-class renewable energy operator and developer, having been an early adopter of wind generation. The company has secured prime wind and solar generation locations across the country, locking in 20-year contracts with price escalator clauses. NextEra’s current growth strategy is focused on solar energy, with over half of its planned renewable energy growth through 2026 allocated to solar and energy storage, and the remainder directed toward onshore wind projects.

The Infrastructure Investment and Jobs Act (IRA) provides, by our estimate using, a 20-year runway of certainty, enabling the company to plan for $20 billion worth of projects and 13 GW of related renewables post-2026. This legislation creates favorable conditions for NEE’s renewable business expansion, with significant opportunities in green hydrogen and commercial and industrial (C&I) sales.

Investors should closely monitor the ongoing internal investigation regarding the Florida donation issues and related management changes, as they could lead to potential reputational risks for the company. Despite the minimal impact on the Florida political and regulatory environment to date, the resolution of the Federal Election Commission (FEC) case remains a concern.

NextEra Energy’s progress in supply chain diversification is another critical factor for investors. The company is working diligently to reduce its reliance on China, shifting its focus to other regions such as Southeast Asia and the US. This strategy will help mitigate potential risks associated with the Biden administration’s 2-year pause on tariffs under the Congressional Review Act (CRA). NEE’s efforts to support new US production facilities demonstrate their commitment to supply chain adaptability and reducing dependence on foreign suppliers.

Lastly, investors should keep an eye on NEE’s relationship with NextEra Energy Partners (NEP). Despite NEP’s current weakness, NEE remains committed to the affiliate, which plays a vital role in the company’s balance sheet management. Strengthening NEP’s position is crucial, as any overhang at NEP could quickly impact NEE. Investors should look for updates on this matter during the Q1 earnings call.

Valuation

Source: All data in this section comes from FactSet.

Based on our research and analysis, NextEra Energy has consistently delivered strong earnings growth, with EPS increasing by over 10% annually over the past three fiscal years. Consensus estimates predict that the company will grow EPS by 7.3% to $3.11 in 2023, followed by a 9% increase in 2024, reaching $3.39. Given NEE’s guidance and historical performance, we believe these estimates are conservative and potentially beatable.

NEE is currently trading at 24.5 times forward 12-month consensus EPS, which is toward the lower end of its five-year range, excluding the Covid-induced market panic in March 2020 when the stock briefly traded down to 21 times earnings. This range typically spans between 23 to 34 times earnings. In comparison to the S&P 500, the stock is trading at a 34% premium, which is also near the lower end of its five-year range, varying from a 30% to 70% premium over this period.

Considering the stability of NEE’s earnings and the ongoing global shift towards green energy, we believe that NextEra Energy’s shares are attractively valued. The company’s robust performance in both its regulated utility business and renewable energy development, combined with the accelerating demand for clean energy solutions, positions it well for future growth. Therefore, we see potential for the stock to outperform market expectations as it continues to capitalize on the growing green energy trend.

Conclusion

NextEra Energy’s unique blend of stable dividends from its regulated utility and the growth potential of its renewable energy business makes it an attractive investment opportunity. Despite facing regulatory uncertainty and supply chain challenges, the company has demonstrated its ability to adapt and capitalize on the growing green energy trend. Based on our analysis and the company’s performance, we believe that NEE’s shares are attractively valued, offering investors the potential for market outperformance as the company continues to expand its renewable energy footprint. As we approach NextEra Energy’s earnings, investors should closely monitor the discussed factors to make informed decisions about this promising stock.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of NEE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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