September 30, 2023

Time to buy these utility stocks with double-digit upside, says Goldman Sachs

The U.S. power grid is undergoing a massive transformation, and renewable energy sources have become increasingly adopted over the past decade.

Adoption will continue at a rapid pace, says Goldman Sachs analyst Carly Davenport. Looking ahead, Davenport estimates that by 2032, more than 45% of US power generation capacity will come from renewable sources and 6% from coal. That compares to a mix of 30%/16% today and 17%/27% in 2012, making the ongoing change very apparent.

Against this backdrop, spurred by the Inflation Reduction Act, and as the power generation mix shifts and the energy transition progresses, Davenport believes utilities are “uniquely positioned to facilitate this shift and address the associated challenges in a way that promotes a cleaner electricity grid while maintaining reliability and affordability for the customer.”

“This shift will require a significant amount of capital investment,” the analyst added, “which we believe will contribute to attractive earnings and interest rate growth in years to come.”

And investors can of course also benefit from this development. With themes such as clean technology, nuclear power, additions to liquefied natural gas (LNG) projects, and “transmission expansion” emerging, investors can take advantage of an “attractive investment opportunity.”

Davenport has compiled a list of stocks, what she and her team call “Decarbonization Enablers,” that are well positioned to benefit from this trend – and she sees three names posting double-digit growth in the coming months. We ran these picks through the TipRanks database to get a more complete picture of their prospects. Let’s see the results.

NextEra Energy, Inc. (NO)

We’ll start with NextEra Energy, a Florida-based electric utility, which, with a market cap of $150 billion, is one of the largest utilities in the U.S. utility industry. NextEra’s principal subsidiary is Florida Power & Light (FPL), with more than 5.8 million customer accounts and power supply to more than 12 million people across Florida. The company generates power at seven nuclear utility plants in Florida, making it a major supplier of zero-emission power.

NextEra doesn’t rely solely on nuclear power for clean energy. The company also operates in the hydrogen segment of the energy industry. In April of this year, the company announced an agreement between its renewable energy subsidiary, NextEra Energy Resources, and CF Industries, a major ammonia producer, to develop a hydrogen project at a CF Industries facility in Oklahoma.

At the end of the first quarter, NextEra owned and operated approximately 4,600 megawatts of solar generation capacity, a total including the 970 megawatts of solar power that was brought online during the quarter. This total makes NextEra the largest solar provider in the US. The company has more than 2,000 megawatts of renewable energy and storage projects in its backlog.

This company has a history of beating earnings expectations and has done so consistently over the past few years, as was the case again in the last reported quarter — for 1Q23. adjective Earnings per share rose from $0.74 in the year-ago period to $0.84, beating forecast by $0.11. Likewise, sales increased a whopping 132.5% year over year to $6.72 billion, beating expectations by $1.5 billion.

Looking at Goldman Sachs’ Carly Davenport, we see her giving a buy rating to NO stock, along with a $90 price target implying a one-year gain of ~22%. (To view Davenport’s track record, click here)

Davenport said the company’s ability to grow revenue while expanding renewable generation capacity is key. She writes, “Three key factors support our Buy rating: leverage on renewables growth, positive regulatory environment and long track record at FPL, and above-average earnings per share growth with discounted valuation relative to history. We view NEE’s regulated utility Florida Power & Light (FPL) as a premium regulated utility with a long runway for growth in a positive regulatory environment… NEE shares underperformed the XLU by ~5% YTD, which we believe offers an attractive entry point for investors.”

Overall, NO gets a strong buy based on The Street analyst consensus, based on 12 recent ratings, including 9 buy and 3 hold. The shares trade for $73.98 and have an average price target of $89.45, suggesting a gain of ~21% year-over-year. (To see NO stock forecast)

Sempra energy (SRE)

Next up is Sempra Energy, a San Diego-based energy company that provides power – electricity and natural gas – to some 40 million customers in California, Texas and Mexico. Sempra is heavily involved in the shift to cleaner energy technologies, including renewables, and is a major supplier and exporter of liquefied natural gas (LNG), which generates significantly less carbon emissions than other fossil fuels.

Sempra’s LNG activities are extensive. The company currently has a major ownership interest in the 12 million metric tons per annum (Mtpa) export facility, Cameron LNG, located in Hackberry, Louisiana on the Gulf Coast. Matching the company’s home base in San Diego, Sempra is also developing LNG export terminals on the Pacific Ocean at Energia Costa Azul in the northwest of Mexico’s Baja California peninsula. This facility offers the possibility to reduce the transit times of LNG exports to Asia from 21 days to 11 days.

Natural gas is big business and Sempra brought in $6.56 billion in total revenue in the first quarter of this year. This was 71.7% more than last year and beat analysts’ forecast by more than $2.5 billion. The company’s bottom line showed solid earnings; adjusted net income in 1Q23 came in at $2.92 per share – 15 cents better than expected.

Sempra uses its strong financial base to expand its infrastructure business. As noted, Sempra is building an LNG export facility in northwestern Mexico – the company is working on additional LNG export terminals in Texas to meet growing global demand for LNG.

According to Carly Davenport, infrastructure expansion and further expansion of LNG export opportunities are important areas for investors to consider. The Goldman analyst writes of Sempra: “SRE has a significant project pipeline for LNG at its Sempra Infrastructure Business (SIP), with the potential for 62 mtpas of total capacity online if all proposed projects are realized, with SRE sharing a portion of the capacity. While the projects are unlikely to come online until the end of 2020 at the earliest, we expect progress towards reaching FID and starting construction down the road to serve as positive catalysts for SRE…We are positive on the business mix of SRE and see SIP as a unique opportunity to gain exposure to LNG in the utilities sector.”

Davenport then rates Sempra shares as a buy, with a price target of $178, showing confidence in a 21% upside for the year ahead.

Overall, with 6 recent analyst ratings on our file, including 4 Buys and 2 Holds, Sempra gets a moderate buy consensus rating from the street. The shares are selling for $147.17 and their $172.17 average price target implies a 17% gain over the next 12 month
s. (To see Forecast Sempra Shares)

Xcel Energy (XEL)

Last on our Goldman supported energy list is Xcel Energy. Known for its commitment to clean, renewable energy generation, this company has a power generation portfolio that includes wind, solar, and hydropower, supplemented by natural gas, nuclear, and biomass.

Power generation is useless without transmission, and Xcel has an extensive network of power transmission assets. This includes more than 1,200 substations and more than 20,000 miles of transmission lines, capable of serving 22,000 megawatts of customer load. Xcel is working to expand this network, which currently operates in 10 states in two major regions of the country. Xcel has transmission networks in Texas-New Mexico-Colorado-Kansas-Oklahoma, as well as the northern states of Plains and Great Lakes in North and South Dakota, Minnesota, Wisconsin and Michigan.

In addition to its power generation and transmission activities, Xcel promotes the use of clean energy and zero-emission vehicles. The company is involved in the development of electric vehicle (EV) technology and provides customers with renewable energy subscription services, including solar panel installations.

On the financial side, Xcel’s 1Q23 results showed total revenue of $4.08 billion, a solid result that was up 8.8% year over year and surpassed analyst estimates by $320 million. The bottom line adj. The EPS figure, of 76 cents per share, was 8.5% higher year-over-year, beating forecast by 2 cents per share.

For Goldman’s Carly Davenport, there are several reasons to support Xcel. She writes, “Key drivers of our positive outlook are the accelerated replacement of coal with regulated renewables, tariff case activity that could lead to improved earned vs. authorized ROEs, and leveraging the opportunity to build out transmission. We see XEL’s wind and solar resource-rich service area as a key competitive advantage that should enable it to achieve its goals.

Davenport puts some numbers on her lips and gives XEL stock a $75 price target, suggesting an 18% upside over the next 12 months, and supporting her Outperform rating (i.e. Buy). (To view Davenport’s track record, click here)

Overall, XEL stock is getting a moderate buy based on analyst consensus, based on 12 ratings with a breakdown of 5 buy and 7 hold. The stock has an average price target of $69.73 and a trading price of $63.57, implying ~10% upside potential for the year ahead. (To see XEL Inventory Forecast)

To find great ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that unites all of TipRanks’ stock insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is for informational purposes only. It is very important to do your own analysis before making an investment.

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