Mario Gabelli Is Bullish on This Renewable Energy Company
- By Dilantha De Silva
Every year, Barron's invites some of the best minds on Wall Street to its elite Roundtable event to discuss the future outlook for global stock markets. As part of this event, gurus discuss their best investment ideas for the year ahead.
This year, Mario Gabelli (Trades, Portfolio) was invited as a panelist, and he shared his view that companies focusing on renewable energy sources are likely to attract above-average valuation multiples in the future as policymakers around the world, including the United States, will support the growth of this industry in a bid to reduce carbon emissions. The guru highlighted NextEra Energy Partners (NYSE:NEP) as one of his best picks for this new year, saying:
"One theme is love your planet, or companies focused on climate change and sustainability. I'll echo Bill's recommendation in the first Roundtable installment of NextEra Energy Partners. CEO James Robo is has done a fabulous job of creating that investment vehicle, or YieldCo, which develops, owns, and manages onshore wind and solar projects. The stock trades for around $80. There are 175 million shares, including 60% owned by NextEra Energy (NYSE:NEE). The entire environmental ecosystem is going to get enormous attention from investors."
Investing in an industry that is expected to grow in leaps and bounds is a tried and tested strategy for generating alpha returns, and NextEra seems to be a promising pick for value investors.
The business
NextEra Energy Partners is a limited partnership formed by NextEra Energy, Inc. (NYSE:NEE) in 2014 to gain exposure to the growing renewable energy industry. NextEra's portfolio of assets includes wind and solar projects in many U.S. states and seven contracted natural gas pipelines in Texas.
Source: Company presentation
The company has an ongoing business partnership with NextEra Energy Resources, which is one of the largest electric wholesalers in the world. This partnership allows the company to purchase high-quality assets from NextEra Energy Resources. This has been one of the key growth drivers in the last five years as the company had access to a large pool of assets owned by NextEra Energy Resources to select the best ones for its portfolio.
Industry outlook
As Mario Gabelli (Trades, Portfolio) highlighted in his recent comments, the energy industry is at an inflection point. There are many positive developments from the macroeconomic front to suggest NextEra and its industry peers will deliver strong earnings growth in the next few years.
The U.S. Energy Information Administration projects renewable power generation to overtake natural gas-fired power generation by 2045 as policymakers continue to support sustainable business industries. Renewable energy sources currently serve around 9% of total U.S. energy needs, but IHS Markit projects the penetration to increase to over 40% by 2030, leaving ample growth opportunities for the leading players in this industry.
Catalysts
There are multiple identifiable catalysts that could help NextEra grow exponentially in the coming years.
First, the company has made sure to buy assets that have already secured long-term power purchasing agreements with creditworthy customers. As of Sept. 30, 2020, the weighted average duration of the remaining contracts was close to 15 years, which goes on to suggest that the company is well-positioned to generate strong cash flows for a long period of time as a result of its existing assets. This will be a key growth driver in the future as the value of high-quality energy assets are likely to increase considerably, making it difficult for a newcomer to report the same return on investment enjoyed by NextEra Energy Partners.
Second, the company's partnership with Energy Resources enables it to buy cash-flow positive assets at an attractive price. As illustrated below, the renewable portfolio of Energy Resources has grown at a stellar pace since 2015, even after selling some of its best assets to NextEra Energy Partners. What is also important to note is that the backlog remains strong, indicating strong momentum behind the company's business operations.
Source: Company presentation
According to company executives, this business partnership alone will be sufficient for the company to grow its revenue by at least 12% per annum through 2024.
Third, regulators across the U.S. have realized the importance of promoting clean energy sources, which will act as a tailwind for NextEra to expand its horizons. As the below map illustrates, many U.S. states had rolled out plans to move toward a zero-carbon future even at the beginning of 2020, and these plans are expected to accelerate with the new policies that will be introduced by the Biden administration.
Source: S&P Global Market Intelligence
Finally, the declining costs of producing wind and solar energy will act as a catalyst for NextEra and other large-scale renewable energy players. As illustrated below, costs of production have dropped considerably since 2010, and the trend is expected to continue at least through 2023, enabling this industry to compete with traditional energy producers.
Source: International Renewable Energy Agency
The catalysts discussed in this segment will help NextEra Energy Partners report consistent growth in the coming years, which is likely to translate into a higher stock price as well.
A healthy and growing dividend
One of the key benefits of investing in a partnership is the attractive dividend yields associated with such businesses. NextEra benefits from tax advantages as well, and this macroeconomic tailwind is expected to be a feature for at least the next decade as the U.S. government is drawing plans to promote renewable energy sources. NextEra has raised its dividend in each of the last six years, and this streak is likely to continue in the foreseeable future as the company's profitability is expected to grow.
Source: GuruFocus
At the market price of around $85 on Jan. 25, NextEra stock yields 2.80%. Although this is not a very high yield, the focus should be on the expected growth.
Takeaway
Mario Gabelli (Trades, Portfolio) believes NextEra Energy Partners will be a winner in 2021, and there's reason to believe that the company will handsomely reward investors in the long run. The appeal of sustainable investing is continuing to grow, which is another positive as the market is likely to attach high valuation multiples for companies that pursue environmentally-friendly business objectives. Considering all of the above, NextEra stands out as a formidable pick for value and income-oriented investors.
Disclosure: The author does not own any shares mentioned in this article.
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This article first appeared on GuruFocus.
