It’s time to buy these utility stocks with double-digit upside potential, says Goldman Sachs

The US power grid is undergoing a tremendous transformation and the use of renewable energy has steadily increased over the past decade.

Going forward, Davenport predicts that by 2032, over 45% of U.S. electricity generation capacity will come from renewable sources and 6% from coal. In comparison, the mix is ​​30%/16% today and 17%/27% in 2012, making the ongoing change very clear.

Against this backdrop, reinforced by the Inflation Reduction Act, and as the power generation mix changes and energy transition advances, Davenport believes utilities are “uniquely positioned to facilitate this transition and to address the challenges it presents in a way while creating a cleaner power grid.” Maintaining reliability and affordability for the customer.”

“This transformation will require significant capital investments,” added the analyst, “which we believe will contribute to attractive earnings and tariff growth for years to come.”

And of course investors can also benefit from this development. As themes such as clean technology, nuclear power, expansion of LNG (liquefied natural gas) projects and “expansion of transmission grids” come to the fore, investors can benefit from “attractive investment opportunities”.

Davenport has compiled a list of stocks that she and her team call “decarbonization enablers” that are well-positioned to benefit from this trend — and she sees three names poised to post double-digit growth in the coming months. We ran these tips through the TipRanks database to get a more comprehensive view of their prospects. Let's look at the results.

NextEra Energy, Inc. (NEE)

We'll start with NextEra Energy, a Florida-based utility company that ranks among the largest utility holding companies in the US utility landscape with a market cap of $150 billion. NextEra's primary subsidiary is Florida Power & Light (FPL), which has more than 5.8 million customer accounts and powers more than 12 million people across Florida. The company generates electricity at seven nuclear power plants for utilities in Florida, making it a major provider of zero-emission electricity.

NextEra doesn't just rely on nuclear power for clean energy. The company is also entering 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 producer of ammonia, 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 power generation capacity, a total that includes the 970 megawatts of solar capacity commissioned during the quarter. That sum makes NextEra the largest solar energy utility in the United States. 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, including its most recent reporting quarter — for Q1 2023. Adj. Earnings per share rose to $0.84 from $0.74 in the year-ago period, beating guidance by $0.11. On the revenue side, too, revenue rose a whopping 132.5% year over year to $6.72 billion, beating expectations by $1.5 billion.

Turning to Goldman Sachs' Carly Davenport, we find that she has a Buy rating on NEE stocks with a price target of $90, which implies a ~22% one-year gain. (To see Davenport's track record, Click here)

Davenport believes the company's ability to grow profits while expanding renewable energy generation capacity are key issues. She writes, “Three key factors support our buy recommendation: leverage on renewable energy growth, positive regulatory environment and long track record of execution at FPL, and above-average EPS growth with valuation discounted compared to history. We view NEE's regulated utility Florida Power & Light (FPL) as a premier regulated utility with long-term growth prospects in a positive regulatory environment. NEE shares have underperformed the XLU by approximately 5% year-to-date, which we think represents an attractive entry point for investors.”

Overall, the Street analyst consensus has a Strong Buy rating on NEE 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, indicating an appreciation of about 21% over the one-year time frame. (See NEE Stock Forecast)

Sempra Energy (SRE)

Next is Sempra Energy, a San Diego-based energy company working to bring electricity and natural gas to about 40 million customers in California, Texas and Mexico. Sempra is deeply involved in the shift to cleaner energy technologies, including renewable energy, and is a major supplier and exporter of liquefied natural gas (LNG), which has significantly lower carbon emissions than other fossil fuels.

Sempra's LNG activities are extensive. The Company currently holds a major interest in the 12 million metric tonne per year (Mtpa) Cameron LNG export facility in Hackberry, Louisiana on the Gulf Coast. In keeping with the company headquarters in San Diego, Sempra is also working on the development of LNG export terminals on the Pacific, at Energia Costa Azul in the northwest of the Mexican peninsula of Baja California. This facility offers the potential to reduce transit times for LNG exports to Asia from 21 days to 11 days.

Natural gas is big business, and Sempra had total revenue of $6.56 billion in the first quarter of this year. That was up 71.7% year over year and topped analysts' forecast by over $2.5 billion. The company's bottom line showed a solid profit; Adjusted net income for the first quarter of 2023 was $2.92 per share — 15 cents higher than expected.

Sempra uses its strong financial base to expand its infrastructure business. As previously mentioned, 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.

Infrastructure development and further expansion of LNG export capacity are the top issues for investors to consider, Carly Davenport says. The Goldman analyst writes about Sempra: “SRE has a significant project pipeline for LNG in its Sempra Infrastructure Business (SIP) with the potential for a total capacity of 62 million tpas online if all proposed projects are realized, of which SRE is a part owns.” Capacity. While the projects are not likely to come online until the late 2020s at the earliest, we anticipate that progress towards the FID and the commencement of construction will serve as positive catalysts for SRE on the way there… We see SRE's business mix positive and see SIP as a unique opportunity to gain access to LNG in the utility sector.”

Davenport continues to rate Sempra stock as a “buy,” with a price target of $178, showing she's confident of a 21% gain in the coming year.

Overall, with 6 current analyst ratings, including 4 “buy” and 2 “hold”, Sempra receives a consensus rating of “moderate buy” from the stock exchange. Shares are selling for $147.17, and their average price target of $172.17 implies a 17% gain over the next 12 months. (See Sempra Stock Forecast)

Xcel Energy (XEL)

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

Power generation is useless without transmission, and Xcel has an extensive network of power transmission facilities. This includes more than 1,200 substations and over 20,000 miles of transmission lines capable of serving 22,000 megawatts of customer load. Xcel is working to expand this network, which is currently active 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 Plains and Great Lakes states of 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 offers its customers renewable energy subscription services, including solar panel installation.

On the financial side, Xcel's Q1 23 results showed total revenue of $4.08 billion, a solid result that grew 8.8% year-on-year and beat analyst estimates by $320 million. Bottom Line Adj. earnings per share rose 8.5% year over year to 76 cents a share, beating guidance by 2 cents a share.

Goldman's Carly Davenport has several reasons for supporting Xcel. She writes, “The key reasons for our positive view are the accelerated replacement of coal by regulated renewables, tariff activity that could lead to an improvement in earned versus approved ROEs, and leverage on the possibility of transmission expansion.” We're looking at that Wind and solar resource rich service areas of XEL as a key competitive advantage that should enable the company to achieve its goals.”

Davenport pulls out some numbers, giving XEL stock a price target of $75, suggesting upside potential of 18% over the next 12 months and supporting its Outperform (ie, Buy) rating. (To see Davenport's track record, Click here)

Overall, according to analyst consensus, XEL stock receives a “Moderate Buy” rating based on 12 ratings split into 5 “buy” and 7 “hold”. The shares have an average price target of $69.73 and a trading price of $63.57, implying ~10% upside potential for the year ahead. (See XEL Stock Forecast)

For great stock trading ideas at attractive valuations, visit TipRanks' Best Stocks to Buy, a newly launched tool that brings together 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 investing.

Leave a Reply

Your email address will not be published. Required fields are marked *