Leading Renewable Energy Stocks to Consider as Oil Prices Plummet
Energy market share outlook
With growth in global oil demand expected to continue its decline to 1.2 million barrels per day in 2020, top oil-producing nations have begun a scramble for market share. OPEC and Russia had a fallout over production cuts on March 6, kicking off a price war that sent oil prices plummeting more than 24% as the nations ramped up oil drilling. The U.S., which became the world's largest oil producer in 2018, also does not plan to cut production in order to support prices. Thus, oil companies will likely see their revenue and share prices drop dramatically, as has been the case with similar scenarios in the past.
According to the International Energy Agency's World Energy Outlook published in November 2019, installed power generation capacity growth for coal and oil has slowed down to an almost flat line as of the time of the report. On the other hand, installed power generation for natural gas and hydroelectric energy have maintained consistent growth of approximately 6.67% and 4.56% per year since 2000, respectively. Solar, wind and other renewable energy growth remained flat through 2005, then began a sharper increase of around 6.12% per year through 2019.
These numbers show that, excluding capacity increases in existing facilities, more growth will come from the natural gas and renewable energy sectors in the coming years compared to coal and oil. As these alternative energy sources increase their installed power generation facilities, they will be in a better position to provide competitive prices and increase their customer bases.
One renewable energy success story is Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). After Berkshire's insurance business, Berkshire Hathaway Energy and BNSF railroad were the conglomerate's top performers for 2019, posting 6% growth in earnings compared to the prior year. Buffett explained the success of Berkshire Hathaway Energy in his 2019 letter to shareholders:
"The extraordinary differential between our rates and theirs is largely the result of our huge accomplishments in converting wind into electricity. In 2021, we expect BHE's operation to generate about 25.2 million megawatt-hours of electricity (MWh) in Iowa from wind turbines that it both owns and operates. That output will totally cover the annual needs of its Iowa customers, which run to about 24.6 million MWh. In other words, our utility will have attained wind self-sufficiency in the state of Iowa."
In contrast to oil, which is running a supply surplus as demand growth falls, the renewable energy sector is seeing growth in both supply and demand as these alternative clean energy sources become cheaper and more widely available.
As a result, the iShares S&P Global Clean Energy Index Fund (NASDAQ:ICLN) ETF has gained 22.45% year over year as of March 11, compared to the SPDR Select Sector Fund - Energy Select Sector (XLE) ETF's -47.75%.
Thus, investors may want to consider the following renewable energy companies, which have strong balance sheets and have managed to grow revenue and net income significantly in recent years.
Vestas Wind Systems
Founded in 1945, Vestas Wind Systems A/S (VWDRY) is a Danish manufacturer, seller, installer and servicer of wind turbines. With turbines in 81 countries, it holds more than 18% of the global installed base for the generation of wind energy.
On March 11, shares of the Vesta Wind Systems traded around $30.12 for a market cap of $17.46 billion and a price-earnings ratio of 22.53. GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10.
Vesta's cash-debt ratio of 3.7 is outperforming 71.04% of competitors. While the Altman Z-Score of 2.46 is in the grey zone, the company's strong cash position means that it is financially stable.
The company generates a 61.8% return on capital and has an operating margin of 8.27%. Revenue and net income have grown consistently in recent years, and the company has not generated a yearly net loss since 2012.
Fortum Oyj
Fortum Oyj (FOJCF) is a Finnish state-owned clean energy company that serves the Nordic and Baltic countries, Poland, Russia and India. Its operations include hydroelectric, nuclear and solar power, as well as recycling and waste solutions. With strong exposure to the Nordic and Baltic countries, which are more focused on renewable energy, Fortum Oyj is centered in one of the fastest-growing clean utility markets in the world.
On March 11, shares of Fortum traded around $19.88 for a market cap of $16.67 billion and a price-earnings ratio of 10.26. According to the Peter Lynch chart, the stock is undervalued by the market.
GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.21 is average, but the interest coverage of 6.47% is higher than 78.63% of competitors.
With an operating margin of 19.83% and a three-year revenue growth rate of 14.5%, Fortum has been increasing its profitability in recent years. Both revenue and net income have grown since 2016. Note that due to changes in local accounting principles and various other factors, including increasing company shift from fossil fuels to alternative energy sources, there are unusually broad fluctuations in revenue and net income history.
SolarEdge Technologies
SolarEdge Technologies Inc. (NASDAQ:SEDG) is a photovoltaics company based in Israel. The company produces power optimizers, solar inverters and monitoring systems that are aimed at increasing the energy output of solar power arrays.
On March 11, shares of SolarEdge traded around $106.11 for a market cap of $5.22 billion and a price-earnings ratio of 36.73. GuruFocus gives the company a financial strength rating of 8 out of 10 and a profitability rating of 7 out of 10.
The cash-debt ratio of 5.76 is higher than 69.89% of competitors, while the Altman Z-Score of 7.16 indicates the company has high long-term financial stability. The current ratio of 2.14 also suggests that the company can easily pay its short-term debts.
The return on capital of 56.89% and operating margin of 13.34% are beating 74.21% of industry competitors. SolarEdge has seen strong revenue and net income growth in recent years after breaking into the profitability zone in 2015.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.
