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3 promising green stocks

Susan Dziubinski  |  22 Apr 2020Text size  Decrease  Increase  |  
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“Green” economy companies typically conserve natural resources, produce alternative and efficient energy sources, or implement clean air and water projects.

In honour of Earth Day, we’re taking a look at three stocks from companies that are doing good for the planet.

This is by no means an exhaustive list, of course. But we think these three companies are market leaders worth further investigation. Moreover, these stocks aren’t all in buying range as of this writing. Given the market swings we’ve been experiencing, though, they may be soon enough. We think they’re worth keeping an eye on.

Ecolab (ECL)

Economic moat: Wide
Morningstar Rating (as of April 16, 2020): 3 stars

A global leader in the cleaning and sanitation industry, Ecolab (ECL) is one of the highest-quality specialty chemical companies we cover, says analyst Seth Goldstein. We think it has carved out a wide economic moat thanks in part of its unmatched scale, and we think that its moat trend is stable. Moreover, Ecolab is a market leader in water management, and we think it is a key player in the growing need for water treatment solutions.

“For investors with environmental, social, and governance concerns, Ecolab offers a way to invest in sustainable water reduction technologies sold to a number of manufacturing industries,” he notes.

Here’s what Goldstein had to say about the firm in a recent Stock Analyst Note:

“In our view, the market is overly focused on the COVID-19 pandemic's near-term impact on Ecolab. We recently reduced our near-term outlook for Ecolab's institutional segment, which includes sales to restaurants and hotels, as well as its energy segment due to our lower near-term oil price forecast. However, we see less of an impact on Ecolab than on its food-service and lodging customers. The majority of the cleaning and sanitation-related products and services Ecolab provides are essential for a restaurant or hotel to remain open for business, regardless of the number of customers or sales volume.

"We see minimal long-term impact on Ecolab's businesses, and we remain optimistic on the company's long-term outlook. In the institutional business, we see rising consumer demand for fresh food, which creates greater supply-chain complexity from a cleaning and sanitation perspective, as an opportunity for Ecolab to increase sales to new and existing restaurant and hotel customers.

"In the industrial business, which sells cleaning and water reduction products and services to manufacturing customers, we see global rising fresh water costs as a long-term demand driver for Ecolab's water management systems. As Ecolab's water management systems can reduce customers' water and energy expenses in excess of the cost of Ecolab's products, we see the water business generating the majority of incremental sales growth over the next decade.”

Dig deeper: Dip your toe into water investing with Ecolab

NextEra (NEE)

Economic moat: Narrow
Morningstar Rating (as of April 16, 2020): 2 stars

NextEra (NEE) is the largest renewable energy developer, and we think management has positioned the company well for the next phase of renewable energy growth, argues senior analyst Andrew Bischof. The utility has an extensive portfolio of businesses and earns a narrow economic moat rating. Specifically, we think its renewable energy business has a sustainable competitive advantage.

“This segment has secured some of the country's most desirable wind and solar generation sites, locking in 20-year-plus purchase power agreements with escalator clauses protecting returns,” explains Bischof.

“Moreover, a large, diversified generation fleet gives this segment scale, cost, and flexibility advantages over smaller competitors. The company recently divested most of its no-moat fossil-fuel generation fleet, strengthening the company’s narrow moat.”

Here’s what Bischof had to say in his latest Stock Analyst Note on NextEra:

“NextEra's high-quality regulated utility in Florida and a fast-growing renewable energy business gives investors the best of both worlds: a secure dividend and industry-leading growth potential.

"NextEra's largest regulated utility, Florida Power & Light, benefits from constructive regulation that offers high allowed returns, little regulatory lag, and low customer rates. Florida's strong economy and population growth support our rate base growth forecast through 2024. FP&L's goal to build 10 gigawatts of solar by 2030 will increase solar to 20% of its energy mix. Investors will earn an immediate return on those investments under automatic customer rate adjustments.

"Recent Florida legislation also supports ongoing storm hardening investments. Battery storage, transmission, and gas generation round out the unit's regulated growth opportunities. We expect another constructive outcome in its planned January 2021 regulatory filing, effective 2022.

"Like at FP&L, NextEra Energy aims to streamline operations, reduce carbon emissions, improve customer satisfaction, and invest in new infrastructure at recently acquired Gulf Power. We expect 10% annual asset base growth and 16% earnings growth through 2024 after incorporating efficiency improvements.

"The competitive energy business, NextEra Energy Resources, is well positioned to benefit from our bullish renewable energy growth outlook. NextEra has proved to be a best-in-class renewable energy operator and developer. Management enters into long-term power sales contracts, which reduce cash flow volatility and exposure to volatile commodity prices.

"Management's continued execution on its Energy Resources development program leaves us confident that NextEra will deliver at the high end of its 11.5 GW to 18.5 GW development target in 2019-22. Declining costs for wind and solar position Energy Resources favorably during the next decade. NextEra's early entry into battery storage will further enhance its competitive position.”

First Solar (FSLR)

Economic moat: None
Morningstar Rating (as of April 16, 2020): 4 stars

First Solar (FSLR) is the world’s largest producer of thin-film solar modules, which use cadmium telluride to convert sunlight into electricity.

“We continue to believe First Solar's core U.S. solar market will grow rapidly during the next decade, supporting our bullish long-term outlook,” reports sector strategist Travis Miller. “[The recent sell-off] offers a good buying opportunity for investors who want a clean energy company with steady cash flow and growth. We are reaffirming our no-moat and stable moat trend ratings.”

While the firm has a leading solar panel technology, we’re uncertain that it can sustain its current competitive advantage for a decade or more and therefore don’t think it has carved out an economic moat. First Solar faces strong competition as the renewable energy landscape becomes more competitive, says Miller.

Here’s what Miller has to say about the company’s business strategy and outlook.

“First Solar has used a slow and steady approach to become the world's leading manufacturer of cadmium telluride, also known as thin-film, solar panels. Demand is so strong that First Solar already has contracted out two years of its current production capacity.

"Solar module makers like First Solar differentiate themselves on cost and conversion efficiency--modules’ ability to turn sun into electricity. First Solar has long been a cost and efficiency leader with its thin-film panels. But the more common silicon-based panel technology is catching up.

"First Solar must stay ahead of a large pack of competitors by continuing to reduce panel costs and increase efficiency. This will require First Solar to invest continually in new technology and production capacity. First Solar's transition to Series 6 modules in 2017 has gone smoothly and demand is strong, a win for investors so far.

"We think management is making a good strategic decision by offloading its project development and engineering, procurement, and construction businesses, which have been a drag on margins. There are enough sophisticated developers in the market that First Solar can concentrate on panel manufacturing. We also think management is making a good strategic decision to focus on the U.S. market and stay out of the retail business.

"If First Solar can maintain its cost advantage and continue its sales momentum, shareholders should realize solid returns. However, we expect First Solar will have to innovate constantly to stay ahead of competitors chasing the fast-growing solar market. We think selling its joint venture yieldco, 8point3 in 2018 was a good move since its cost of capital advantage had eroded.”

 See also Morningstar Guide to International Investing

is director of content for Morningstar.com.

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