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NEE Trades at Premium to Industry: How to Play the Stock?

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NextEra Energy’s (NEE - Free Report) shares are trading at a premium compared to the Zacks Utility - Electric Power industry. Its price-to-earnings F12M 21.26X is higher than the industry average of 16.78X and the broader Zacks Utilities sector’s average of 17.18X.

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NextEra Energy has been a steady performer in the utility space and has gained 37.2% in the past year, outperforming its industry’s rally of 26.6%. The steady rise in NextEra Energy’s share price is a reflection of the strong performance of the company and customer growth, which is boosting demand for its services.

NEE's Price Performance (One Year)

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Improving share price post-earnings release surely can’t be the only reason for adding NextEra Energy in your portfolio. Let’s delve deep and find out factors that can assist investors in deciding whether it is a good entry point or one needs to wait longer for a better entry point for NEE stock.

Factors Driving NextEra Energy Stock Higher

NextEra Energy’s unit, NextEra Energy Resources, is gaining from demand through an existing replacement cycle and a new growth cycle. Energy Resources has been replacing the higher-cost, less-efficient generation being retired in favor of low-cost renewables and battery storage. In the third quarter, the company added 3,000 megawatts (MW) of new renewables and storage projects to its backlog. NextEra Energy Resources has more than 24 gigawatts in renewable and storage backlog, which supports its long-term growth expectations.

The demand for clean electricity is rising, and NextEra Energy can meet it through strategic investments to strengthen and upgrade its infrastructure. NextEra’s unit, Florida Power & Light Company (“FPL”), has plans to invest $38 billion in the 2024-2028 time period. FPL's focus is on clean, efficient, modernized generation and a stronger and smarter grid. Out of the total, Florida Power & Light plans to invest nearly $14.7 billion in Transmission & Distribution projects from the remainder of 2024 to 2028 to support customer growth and continue hardening the energy grid, which will allow the company to provide power to customers even during storms. The improving Florida economy is boosting prospects of the company by creating opportunities for fresh demand.

NextEra Energy has been managing debt effectively and has top-tier credit ratings, ranging from A to Baa1, from all major rating agencies. Debt to capital of the company is 52.61% lower than its industry average of 54.15%. The drop in the interest rates by 75 basis points will definitely lower NEE’s long-term capital servicing expenses and boost its margins.

The U.S. Energy Information Administration, in a release, predicted the annual growth in total U.S. electricity demand to average about 1% from 2022 through 2050. NextEra Energy, with its wide-spread renewable assets, is well positioned to capitalize on the massive opportunity of expected power demand growth in the U.S. The development of large data centers and rising demand from industrial and commercial space will continue to boost demand for electricity.

NextEra Energy is making smart capital investments that keep bills low while delivering reliable electricity. The rising demand and expanding customer base allow the company to come out with consistent performance, and it surpassed the Zacks Consensus Estimate in the last four reported quarters, with an average surprise of 7.05%.

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NextEra Energy’s Earnings Estimates Move Up

NextEra Energy reiterated its 2024 earnings per share in the range of $3.23-$3.43 compared with $3.17 a year ago. The Zacks Consensus Estimate for NEE’s 2024 and 2025 earnings per share indicates year-over-year growth of 7.57% and 7.59%, respectively. The company expects to increase its earnings per share in the range of 6-8% annually through 2027 from the 2024 level.

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NEE’s ROE Better Than Its Industry

NextEra Energy’s trailing 12-month return on equity (ROE) is 11.94%, ahead of the industry average of 10.98%. ROE is a financial ratio that measures how well a company uses its shareholders’ equity to generate profits. The current ROE of the company indicates that it is using shareholders’ funds more efficiently than its peers.

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Summing Up

NextEra Energy continues its stable performance, backed by rising demand for clean energy in its service territories. The reliability of its services and low electricity bills creates a competitive advantage for the company. The strong economic condition in Florida continues to develop new opportunities for the company.

Given the improvement in earnings estimates and return on equity, it will be wise to remain invested in this Zacks Rank #3 (Hold) utility. Since NEE is trading at a premium, it is better to wait for a while and look for a better entry point.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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