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3 renewable energy stocks

Vikram Barhat  |  22 Apr 2021Text size  Decrease  Increase  |  
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The need for carbon reduction and efforts to counter climate change have never felt more urgent. Leading from the front, the Biden administration is working with allies including Japan, Korea and Canada to boost carbon emission reduction targets, while considering policy options to meet that goal by 2030. For now, all eyes are on the highly anticipated April 22 international climate summit, which coincides with Earth Day, an annual event that marks support for environmental protection.

A significant part of the effort to combat global warming is geared towards lowering dependence on fossil fuel and replacing it with renewable energy. A report from the International Energy Agency (IEA) forecasts renewables to account for 95 per cent of the net increase in global power capacity through 2025, as cost reductions and sustained policy support continue to drive strong renewables growth. If you’d like to participate in the space, keep an eye on these stocks. 

Evergy Inc (EVRG)

  • Current yield: 3.50%
  • Forward P/E: 18.52
  • Price US$60.91
  • Fair value: US$58
  • Value Fairly valued
  • Moat Narrow
  • Moat Trend Stable
  • Star rating ***

Data as of April 14, 2021

The utility’s five-year US$9.2 billion Sustainability Transformation Plan (STP) includes US$3 billion of transmission investment and US$675 million of renewables, both of which have tax and other incentives in President Biden’s US$2 trillion infrastructure investment plan, says a Morningstar equity report. US regulated electric utility, Evergy with a combined rate base of approximately US$15 billion, operates and owns 94 per cent of the 1,200 MW Wolf Creek nuclear plant. While coal and natural gas supply over 50 per cent of total sales, Evergy gets about 27 per cent of its power from renewables, mostly wind, making it one of the largest wind energy suppliers in the US. 

“Even if Biden fails to advance his plan, the administration’s focus on infrastructure will provide a tailwind for the STP investments,” assures Morningstar equity analyst Charles Fishman, adding that the regulated utility boasts a solid balance sheet, significant investment opportunities in wind energy and transmission, and more flexibility to meet environmental requirements.

Fishman recently raised the stock’s fair value from US$57 to US$58, prompted by Biden’s US$2 trillion infrastructure investment proposal. 

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First Solar Inc (FSLR)

  • Current yield: -
  • Forward P/E: 17.79
  • Price US$79.88
  • Fair value: US$64
  • Value 23% premium
  • Moat None
  • Moat Trend Stable
  • Star rating **

Data as of April 14, 2021

 Sustainable energy giant, First Solar is the world's largest manufacturer of thin-film, solar panels. The company designs and makes photovoltaic panels, modules, and systems for use in utility-scale development projects. It has production lines in Vietnam, Malaysia, and Ohio.

As lower costs and tougher environmental regulations drive global solar market growth, First Solar has narrowed its strategic focus to the US, Europe, and India. “Government policies, corporate demand, and robust project development industries in these regions make these the world's most attractive solar markets,” says a Morningstar equity report, adding that the firm’s US manufacturing base also gives it an advantage winning US contracts.

First Solar differentiates itself 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,” says Morningstar sector strategist, Travis Miller, but cautions that the company must stay ahead of a growing competition by continuing to lower panel costs while increasing efficiency.

Virtually all of First Solar’s 2021 and half of its 2022 production is sold out. Therefore, the solar-panel maker’s growth depends on its ability to expand production. However, “bookings will have to pick up in 2021 and 2022 to justify another round of production capacity expansion,” says Miller, who pegs the stock’s fair value at US$64. 

NextEra Energy Inc (NEE)

  • Current yield: 1.95%
  • Forward P/E: 31.35
  • Price US$78.78
  • Fair value: US$75
  • Value Fairly valued
  • Moat Narrow
  • Moat Trend Stable
  • Star rating ***

Data as of April 14, 2021

NextEra Energy (NEE) provides power to roughly 5 million customers in Florida. The firm’s regulated utility, Florida Power & Light, accounts for roughly 60 per cent of the group's operating earnings. The renewable energy segment generates and sells power throughout the US and Canada. Its other sources of power generation include natural gas, nuclear, wind, and solar.

“NextEra Energy'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 renewable energy growth potential,” says a Morningstar equity report. FP&L aims to generate 10 gigawatts of solar by 2030 which will boost solar to 20 per cent of its energy mix.

“Investors will earn an immediate return on those investments under automatic customer rate adjustments,” says Morningstar equity analyst, Andrew Bischof, who puts the stock's fair value at US$75, further pointing out the company plans to pair battery storage with its solar installations.

A large, diversified generation fleet gives this segment scale, cost, and flexibility advantages over smaller rivals. The company’s highly contracted renewable energy business “is well positioned to benefit from our renewable energy growth outlook,” says Bischof, asserting “NextEra has proven to be a best-in-class renewable energy operator and developer.”

To find companies that can effectively compete in the transition to a low-carbon economy, investors can turn to the Morningstar US Low Carbon Risk Index. The index features large- and mid-cap stocks that have undergone a carbon risk assessment by Sustainalytics, Morningstar's ESG research partner.

is a Toronto-based financial writer.

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