Posts from nist.gov
[DD] 12k on NextEra Energy (NEE) LEAPs as a clean energy playI wasn't really planning on making a post on this, but I'd like to make the case for investing in a utilities company focused on clean energy as a smart play for the upcoming stimulus/shift towards renewables. So what's NextEra Energy? Summarized from Wikipedia: * It is the largest electric utility in the USA by market capitalization. (At 160B currently) * Revenues of over $19.20 billion in 2019. Operating income of $5.35 billion in 2019. * About 14,000 employees throughout the US and Canada. * The important subsidiaries include * The Utilities; * Florida Power & Light (FPL) - A Florida electric utility. Notable for having wider profit margins than usual. * Gulf Power Company - Electric utility in the Alabama area * NextEra Energy Capital Holdings (NEECH) * NextEra Energy Resources (NEER) - The largest operators of wind and solar projects in the world. Importantly, expansive holdings in the Midwest. Also has numerous energy storage projects under their belt. * They also have a 35% stake in NextEra Energy Partners (NEP) with Jim Robo being the CEO of both companies. In fact, I'll just direct you to NextEra's IR page, because for some reason they've placed a very solid series of pages outlining their financial health where almost nobody will find them. You can flip through the Policy, Strength, Funding/Capital Structure, Cash Flow/Leverage, and Liquidity pages there at your leisure to understand more about the company. But basically, they're extremely healthy as a company. Notably, they've beenunwinding positions for cash recently despite their solid balance sheet. Now, I'd like to point out their P/E: 41. Yup, this is a "boring" utility company trading at 41x P/E after running up 200% in 5 years and 80% in 2. For reference, Microsoft is trading at 34.90 P/E. As far as utilities go, I think it's fair to say these guys are as far from boring as it gets. Summary of the fundamentals; * Management is extremely reliable * They're the market leader in renewables deployment * They've proven they know how to compete and edge out profits in cutthroat industries * High P/E, but in a stable industry * They have plenty of leverage available for massive capital expenditures Now onto why I think they will collect more than their fair share of Biden's upcoming stimulus. Let's start off by looking at what Biden has been pushing in his announcements; * Pushing the environmental costs onto polluters * Pushing renewables directly * Creating long-term middle class union jobs Among utilities, NextEra stands out as an early and consistent investor in renewables . Straight from the link above: According to S&P Global Trucost, NextEra Energy ranked ahead of its peers on a number of impressive reported performance metrics, among others, including signed contracts to build approximately 12,000 megawatts of additional wind, solar and battery storage projects as of the close of 2019, and NextEra Energy's announced target of emissions reductions per unit of generation by 67% by 2025 from a 2005 baseline, equivalent, to a 40% reduction in absolute emissions – and this, despite an expected doubling of generation over the period. Already, NextEra Energy reports more than 50% of its generation is from zero- and near-zero-emitting sources. I think it's fair to say that point 1 will hurt them much less than it will their less progressive competition. Additionally, as a result of their investments so far, they're not untested when it comes to deployment: They know what to expect and we know they can execute on larger CapEx programs with less risk than the competition. If Biden is to throw the expected 40 billion a year into the industry, it's quite likely NextEra will be ready to scale up operations sustainably and successfully to capitalize on the opportunity, clearing point two. But point three is the really interesting one. Let me start off with a question; If you were a democratic president that wanted to create middle-class jobs in renewables, how would you go about it? Would you invest in the companies making the end product? Maybe a little for the companies that pull the required resources out of the ground too? Let's take a look at what the clean energy portion stimulus bill a few weeks ago contained and see how NextEra is positioned for each portion. Big thanks to /u/millerlit for summarizing. Also, I'll be referencing the NextEra 2019 annual report from this point on . Please bring up a copy if you'd like to verify the numbers I claim. * $1.5 Billion for Solar - Will probably go to most industry players pretty equally, NextEra will get a cut as a result of their investing through NEER. 12% of NEER's generation is from solar power according to the 2019 annual report (p.13). * $2.6 Billion for Transport - NextEra probably won't get much of this, but they havemade an acquisition in the field within the last month. It would be a nice perk if they announced major projects here, but let's just leave this as a hypothetical. * $1.7 billion for a Weatherization Assistance Program - I'm not 100% sure how they'll break this down, but up here in Canada they do these programs as rebates through utility providers.NextEra is almost definitely going to get a cut of this as far as I can see. * $1.08 billion for short-term, long-term, seasonal and transportation energy storage technologies - NextEra is pretty big in the battery storage field.I don't think they'll be the ones developing a new battery chemistry, but they're definitely a serious user. * $2.36 billion for smart utility and energy distribution technologies. - They're going to get a serious cut of this for obvious reasons. * $625 million for new research, development and commercialization for both onshore and offshore wind technologies - 65% of NEER's renewables generation is wind power according to the 2019 annual report. They're going to get a nice cut here too. * $850 million for geothermal technology development - Nothing here will go to NextEra, as far as I'm aware. * $1093 million for marine energy and hydropower tech - Nothing here will go to NextEra, as far as I'm aware. * $500 million pot for industry and transportation looking to decarbonize - 0 stake in this race * $6.2 billion for carbon capture utilization and storage technologies - FPL is investing quite heavily here, as 74% of their generation back in 2019 was from Natural Gas (p.9). They're going to get a good portion of this. * $6.6 billion in funding for the modernization of existing nuclear power plants and the development of advanced reactors - FPL generated 22% of their power from Nuclear in 2019 (p.9). They're probably going to get a fair slice of this. * $4.7 billion for fusion industry - NextEra isn't spending money on fusion development, as far as I'm aware. * Looser regulations for using government land for renewables - A nice gesture to drop land costs by increasing supply for sustainable uses.Here's a map of US public land so you can take a look. But you get the point by now - NextEra has a slice in a lot of these pies directly. On top of that, the renewables segment as a whole is going to hugely benefit from the stimulus driving down the capital expenditures required for panels and turbines. Frankly, there are very few people better positioned than a well-run utility company with massive credit available taking on the debt at great rates. When I put it like that, it's no surprise that these folks managed to thrive under Trump's policies - and that they're extremely well positioned to grow aggressively under Biden. But there's even a fun political trap for the republicans here. Do you know where the best place to place on-shore wind turbines is?The midwest (Source ) - A notable republican stronghold area . NEER's own wind turbine deployment map in the annual report (p.13) backs up that their expansion is largely in that area. I wouldn't be surprised at all if the Democrats quietly slated a lot of the renewables spending into the midwest in an attempt to entrench a pro-union and pro-clean energy vote there - forcing the republican platform into a weird spot in future elections. It helps that that's pretty much the economical way to play it too. To sum it up, I think NextEra's going to be a serious beneficiary of the renewables bill however it ends up going down, even if only because of their financial resources, deployment experience, and contracts with suppliers. A big portion of this is that I don't believe the market has priced in the amount they're collecting directly and indirectly because the response so far seems to have been "FAN/TAN/ICLN/QCLN goes brrrrr". Let's talk about the competition; The other US utility companies that were listed as leaders in the clean energy transition by Global Platts are Dominion Energy, Sempra Energy, and Xcel Energy. From one look at them it seems like they're (1) much smaller and (2) at best half off on P/E so I didn't really look at them too hard if I'm being honest. Now for the bigger question; Do I grab NEE or [clean energy ETF of choice]? Really, it's up to you. I think that the clean energy ETFs are trading at downright idiotic valuations now. That, and I'd much rather bet on one or two known strong performers that I believe in than I would on a bunch of companies picked by someone else. That being said, those ETFs have much more hype behind them, which is an important consideration in this market. Short-term catalysts are basically the stimulus bill and earnings on the 26th. I expect some big announcements on how they plan to capitalize on the bill during the earnings call, and a huge bump in interest if they announce that they're accelerating their renewables pipeline and focusing on that portion of the company more. Anyways, onto positions and how I'd trade it; * If you just want to buy and hold in an account for the extreme long-term -> buy shares and hold, I think this is going to heavily outperform the S&P 500 into the future. * If you want to get some of the spicy synthetic leverage gains with me -> Jan 20 2023 80c's. They print if the stock goes up ~15% in the next 2 years because IV is super low. I grabbed 10 at 12.10 at the start of the week on the dip, but I think they'll open 13.00+ tomorrow. Keep in mind that you don't need to hold till expiry, I'll probably liquidate these after a year because I want the tax benefits. That's all from me today! This is my first DD post ever, so if you've got any suggestions/questions feel free to fire away.