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3 Alternative Energy Stocks Braving Industry Headwinds

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·8 min read
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Rapid wind turbine installations in the recent past have made wind energy a primary growth catalyst for the U.S. renewable space. With industry leaders expecting solid capacity additions in the coming days, we expect to witness further growth for wind-focused stocks.

Also, increasing scope of the fuel cell market is expected to boost the prospects of the U.S. renewable stocks. However, tariffs imposed on the import of aluminum and steel cloud the optimistic outlook for the U.S. renewable stocks to some extent. The forerunners in the U.S. alternative energy industry are Ameresco (AMRC), Covanta Holdings (CVA) and Vesta Wind (VWDRY). 

About the Industry

The Zacks Alternative Energy industry can be fundamentally segregated into two sets of companies. While one group is involved in the generation and distribution of alternative energy and electricity from sources like wind, natural gas, biofuel, hydro and geothermal, the other set is engaged in development, design and installation of renewable projects involving these alternative energy sources.

The industry also includes a handful of stocks that offer fuel cell energy solutions, which have gained popularity as an affordable clean energy of late. Per a report by Bloomberg Green, in 2019, clean energy investment in the United States totaled $55.5 billion, reflecting a 28% increase from the prior year, with wind and solar leading the way.

3 Trends Shaping the Future of the Alternative Energy Industry

Wind Energy – A Key Growth Catalyst: Among alternative energy sources, wind energy continues to make noticeable progress in the United States. Per the latest report by the American Wind Energy Association, the U.S. wind industry installed nearly 2,000 megawatts (MW) of new wind power capacity in the third quarter of 2020, setting a record for third-quarter additions. Notably, wind turbine installations through the third quarter increased 72% on a year-over-year basis. Factors like government policies like extended federal Investment Tax Credit (ITC) for offshore wind energy along with extension of production tax credit have boosted overall wind capacity additions lately. Also, a steadily decreasing input price along with increasing flow of investments from all over the world has been instilling growth in the wind industry.

In spite of the persistent adverse impact of the COVID-19, the U.S. Energy Information Administration (EIA) expects electricity generation from renewable energy sources to rise from 18% in 2019 to 20% in 2020, with planned additions to wind generating capacity being one of the primary catalysts. Moreover, a recent report by the EIA reveals that project developers expect more than 23 gigawatts (GW) of wind turbine generating capacity to come online in the United States in 2020. Notably, this capacity addition reflects 74% growth when compared with the industry’s previous record of adding 13.2 GW capacity in 2012. This surely boosts the growth prospects of the alternative energy industry.
Rise of Fuel-Cell Technology: Increasing interest in hydrogen as an alternative transportation fuel has been observed owing to hydrogen’s ability to power fuel cells in zero-emission vehicles, its potential for domestic production, and the fuel cell's potential for high efficiency. In fact, a fuel cell is two to three times more efficient than an internal combustion engine running on gasoline. Therefore stocks involved in fuel cell are gaining increasing attention these days. In particular, companies like Bloom Energy (BE), Ballard Power Systems (BLDP), Plug Power (PLUG) and FuelCell Energy, Inc. (FCEL) are using fuel cell technology to supply clean energy. In November, The US Department of Energy (DOE) released its Hydrogen Program Plan to provide a strategic framework for the Department’s hydrogen research, development, and demonstration (RD&D) activities. This should enhance the scope of fuel cell market expansion, thereby boosting the outlook for U.S. alternative energy stocks.
Import Tariffs Pose Risk: Donald Trump dealt a blow to the U.S. alternative energy industry by imposing an import tariff of 25% on steel and 10% on aluminum in March 2018. In January 2020, another round of tariffs was imposed on steel and aluminum derivatives like imported nails, staples, electrical wires and a few more. Steel and aluminum are widely used as raw materials to construct critical wind turbines, storage and hydroelectric components. After 2018’s tariff imposition, GTM Research, MAKE Consulting and Wood Mackenzie collectively calculated that such imposition can push uplevelized cost of energy for U.S. renewable power plants by 3–5%, thereby leading to slightly lowered forecast for project deployments or slightly lowered project returns. No doubt the extension of such tariffs may have weighed heavily on the industry’s growth trajectory.

Zacks Industry Rank Reflects Grim Outlook

The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #168, which places it in the bottom 34% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential in recent times. Evidently, the industry’s earnings estimates for the current fiscal year have gone down by 45.7% since Mar 31.

Before we present a few alternative energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500, Beats Sector

The Alternative Energy Industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year. The stocks in this industry have collectively lost 1.7% while the Oils-Energy Sector has slumped 26%. The Zacks S&P 500 composite has however gained 17.3% in the same timeframe.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 4.30 compared with the S&P 500’s 16.22 and the sector’s 4.88.

Over the last five years, the industry has traded as high as 4.30X, as low as 2.70X, and at the median of 3.93X, as the charts show below.


3 Alternative Energy Stocks to Add to Your Portfolio

Ameresco: Based in Framingham, MA, Ameresco is a leading independent provider of comprehensive energy efficiency and renewable energy solutions for facilities throughout North America and the United Kingdom. As of Sep 30, 2020, the company’s total project backlog remained strong at $2.2 billion, which included $1 billion in contracted backlog, representing signed customer contracts for installation or construction of projects, which is expected to convert into revenues over the next one to three years, on average.

The Zacks Consensus Estimate for Ameresco’s 2020 earnings has moved up 11% in the past 60 days while that for 2021 has risen 9.3%. The company delivered an average earnings surprise of 68.56% in the last four quarters.  The company currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Covanta Holdings: Based in Morristown, NJ, Covanta offers waste and energy solution to its customers by processing the waste and generating energy out of it, which is named as Energy-from-Waste. Its modern Waste-to-Energy facilities safely convert approximately 21 million tons of waste from municipalities and businesses into clean, renewable electricity to power one million homes and recycle 500,000 tons of metal. Covanta’s first three projects in the United Kingdom are under construction and the company is expected to generate cash flow from 2022.

The Zacks Consensus Estimate for Covanta’s 2020 loss has improved 17.9% in the past 60 days while that for 2021 has improved 75%. The company delivered an average earnings surprise of 75.05% in the last four quarters.  The company currently holds a Zacks Rank #2.

Vestas Wind Systems: Based in Randers, Denmark, Vestas Wind Systems designs, manufactures, installs and services wind turbines across the globe. With over 23,500 MW installed and more than 24,000 MW under service, the company enjoys a dominant position in the U.S. alternative energy industry.

The Zacks Consensus Estimate for Vestas Wind Systems’ 2020 earnings has improved 16.8% in the past 60 days while that for 2021 improved 5.2%. Its 2020 sales estimate indicates year-over-year improvement of 19.7%.  The company currently holds a Zacks Rank #2.

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Vestas Wind Systems AS (VWDRY) : Free Stock Analysis Report
Plug Power, Inc. (PLUG) : Free Stock Analysis Report
FuelCell Energy, Inc. (FCEL) : Free Stock Analysis Report
Covanta Holding Corporation (CVA) : Free Stock Analysis Report
Ballard Power Systems, Inc. (BLDP) : Free Stock Analysis Report
Bloom Energy Corporation (BE) : Free Stock Analysis Report
Ameresco, Inc. (AMRC) : Free Stock Analysis Report
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