Shares of the world’s largest utility company by market capitalization, NextEra Energy, Inc. (NEE), have gained 26.8% over the past year to close yesterday’s trading session at $78.32. They hit their $87.69 all-time high on January 25, due to keen investor interest in the renewable energy space--an interest, heightened by President Biden’s ambitious plans to address climate change.
With a 2.79% four-year average, NEE is also a solid dividend stock. The company paid a $0.39 quarterly dividend on March 15, 2021. Moreover, the company agreed to acquire four wind farms from Brookfield Renewable Partners L.P. (BEP), which will be its biggest acquisition since 2019.
However, investors are now focused primarily on sectors such as finance and manufacturing that are positioned to perform well with an economic recovery. And NEE’s stock fell sharply following its mixed financial results in its fiscal year 2021 first quarter. It has declined by nearly 7% over the past three months. So, we think it’s wise to avoid the stock now because it looks overvalued at its current price level considering its limited growth potential in the near term.
Here’s what we think could shape NEE’s performance in the near term:
Industry Tailwinds
As part of a new commitment to the Paris climate agreement, President Joe Biden announced yesterday that the U.S. aims to cut greenhouse gas emissions in half by 2030. Furthermore, his proposed $2 trillion infrastructure plan includes $100 billion for electric grid renovation. Against this favorable backdrop, NEE is expected to witness greater demand for its services because its subsidiary Florida Power & Light (FPL) operates one of the cleanest power generation fleets in the United States.
Also, NextEra Energy Resources, LLC (NEER), another NEE subsidiary, is the world’s largest generator of renewable energy from wind and solar. Wind energy has grown by 275 TWh (or roughly 17%) over the last year, while Solar PV electricity generation is expected to increase 18% to approach 1,000 TWh in this year.
Mixed Financials
NEE’s net income increased 295.7% year-over-year to $1.67 billion for its fiscal year 2021 first quarter, ended March 31, 2021. Its adjusted EPS also increased 13.6% year-over-year to $0.67 for the quarter. However, NEE’s total operating revenues declined 19.2% year-over-year to $3.73 billion in the first quarter, and its operating income came in at $669 million, down 66.2% year-over-year.
Stretched Valuation
In terms of forward non-GAAP price/earnings ratio, NEE’s 31.04x is 57.7% higher than the industry average 19.68x. In terms of forward price/sales ratio, the stock’s 7.58x is also significantly higher than the industry average 2.66x. The stock’s forward EV/S of 10.58x is 140.5% higher than the industry average 4.40x.
POWR Ratings Reflect Uncertain Near-Term Prospects
NEE has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. NEE has a C grade for Growth also. This is justified given that analysts expect its revenue to increase 12.7% in its fiscal year 2021 but decline 2.3% for the current quarter ending June 30, 2021. It also has a C grade for Stability.
The stock has a D grade for Value, which is in sync with its higher-than-industry valuation ratios.
Beyond what we’ve stated above, we have also given NEE grades for Momentum, Sentiment, and Quality. Get all NEE ratings here.
NEE is ranked #22 of 58 stocks in the Utilities – Domestic industry.
Better than NEE: Click here to access two top-rated stocks in the same industry.
Bottom Line
NEE is well-positioned to gain from the industry tailwinds over the long term. However, its near-term prospects look uncertain. So, we think it’s wise to wait for a better entry point.
NEE shares were trading at $78.12 per share on Friday morning, down $0.20 (-0.26%). Year-to-date, NEE has gained 1.79%, versus a 11.40% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.
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