NextEra Energy (NEE) has experienced positive momentum with its stock price over multiple years. This was a result of consistent revenue and earnings growth. I expect the stock to continue to outperform over the next few years as the company steadily grows revenue and earnings going forward.
As one of the largest electric power companies in North America, NextEra has the scale and resources to drive growth through acquisitions. The Texas PUC recently rejected the sale of Oncor Electric Delivery to NextEra. However, there are plenty of other acquisition opportunities for NextEra to drive future growth.
NextEra’s strategy has been to acquire and operate natural gas and nuclear generation facilities. The company is also the largest generator of renewable energy from the wind and sun in North America based on MWh produced in 2016. The company has been able to run profitably and sustainably over many years.
Image source: onsizzle.com
With the Oncor acquisition most likely off the table, NextEra is positioned well for another acquisition. NextEra sold FiberNet and its subsidiaries to Crown Castle (CCI) for $1.5 billion in cash. FiberNet was sold to fund the Oncor acquisition. Therefore, the cash from the sale of FiberNet can be used for the acquisition of another utility company.
There are plenty of other utility companies available to be acquired in the United States. There are also other electric and gas utilities available for acquisition in Canada. Granted, not all of the utilities listed at those links are available for acquisition. I just wanted to show the full list from both countries.
Last year, Bloomberg identified twelve companies that look ripe for takeovers. Out of that list, Questar and WGL Holdings were already acquired and NextEra already unsuccessfully tried to acquire Hawaiian Electric. So that leaves the following nine that look ripe for acquisitions based on size, location, leverage and acquisition: Chesapeake Utilities (CPK), Portland General (POR), Allete (ALE), Pinnacle West (PNW), Idacorp (IDA), CenterPoint (CNP), Vectren (VVC), Alliant (LNT) and Avista (AVA). It is possible that NextEra is interested in acquiring one or more of these companies.
New acquisitions will allow NextEra to gain new sources of revenue and earnings. The acquisitions from this list that would be the best fit for NewEnergy in my opinion are Chesapeake, Avista and Alliant Energy, which all have natural gas operations. Allete also looks like a good fit since the company has a focus on clean renewable energy.
NextEra is trading with a forward EV/EBITDA of 10.5, based on expected EBITDA of $8.96 billion for 2018 (consensus). This is slightly below the average of its peers. Dominion Resources (D), Duke Energy (DUK) and Southern (SO) are trading with forward EV/EBITDA ratios of 11.4, 11.3 and 10.1, respectively.
The average forward EV/EBITDA ratio for NextEra’s peers is 10.9. NextEra is trading 3.7% below that average. So I think NextEra is reasonably valued, especially since NEE pays a 3% dividend and has steady single-digit revenue and earnings growth.
Consider the MLP: NextEra Energy Partners
The MLP known as NextEra Energy Partners (NEP) has a much lower valuation. NEP is trading with a forward EV/EBITDA ratio of only 5.7. NEP has an attractive yield of about 4.3%. NextEra Energy Partners has higher expected annual revenue growth in the double-digits (consensus) for 2017, 2018 and 2019 as compared to NEE’s single-digit expected annual revenue growth. NEP is also expected to grow earnings at strong double-digit rates (consensus) in 2018 and 2019 after experiencing an expected 9% dip in 2017.
Therefore, with a lower valuation and stronger expected growth, I think NEP is likely to experience higher price appreciation than NEE over the next few years.
As you can see with the recent failed acquisition attempt of Oncor and the previous failed attempt to acquire Hawaiian Electric, NextEra may not always get the companies that it is targeting. Some states won’t approve the transactions. Acquisition rejections could lessen NextEra’s growth.
NextEra is trying to save the Oncor deal. This means that NextEra is attempting to negotiate the terms of the deal in hopes of getting the acquisition approved. This is likely to take more time before another approval decision will be made. That could delay NextEra’s next acquisition if the Oncor deal is rejected again.
NEP looks more attractive than NEE in my opinion. Since NEP is an MLP, it is handled differently than NEE for tax purposes. Fortunately, today’s tax preparation software easily handles either situation.
NEP’s lower valuation and higher expected growth as compared to NEE is likely to drive the price to outperform. With a low valuation and double-digit revenue and earnings growth for 2018 and 2019, NEP is likely to experience higher price appreciation than the S&P 500 and NEE over the next few years. However, NEE is still likely to be a solid dividend growth investment going forward, just with less price appreciation than NEP, in my opinion.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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