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Raymond James Updates Clean Tech Outlook: M&A, Yield In Focus

Ezra Schwarzbaum

Clean tech companies have traded flat on aggregate this year versus the S&P 500’s 2-percent gain, a sharp contrast from when it was the best-performing energy subsector.

Yet clean tech "remains a stock picker’s market,” Raymond James analyst Pavel Molchanov said in a Thursday note. First Solar, Inc. (NASDAQ: FSLR) stock is down 22.6 percent in the first half of 2018, while Enphase Energy Inc (NASDAQ: ENPH) is up 197 percent.

Molchanov made his latest picks Thursday, upgrading Advanced Energy Industries, Inc. (NASDAQ: AEIS) and downgrading Clean Energy Fuels Corp (NASDAQ: CLNE) and NextEra Energy Partners LP (NYSE: NEP). (See the analyst's track record here.) 

The Ratings

  • Advanced Energy Industries was upgraded from Market Perform to Outperform with a $72 price target.
  • Clean Energy Fuels was downgraded from Market Perform to Underperform.
  • NextEra Energy Partners was downgraded from Outperform to Market Perform.

The Thesis

Shares of Clean Energy Fuels closed Tuesday at $3.71, up 82.8 percent for the year. What is striking about the stock’s rally is that it occurred almost entirely after the company announced a partnership with Total SA (NYSE: TOT) on May 10.

Molchanov said there's “excess euphoria” surrounding the deal, driving its extreme valuation.

Investors looking to support their bull case should watch for any news out of Congress on the Alternative Fuels Tax Credit, which was retroactively reinstated in February to cover 2017 — although it seems unlikely Congress will move to revive the credit before the midterm elections, if at all, Molchanov said. 

Unlike Clean Energy Fuels, the analyst said NextEra Energy Partners’ “undeniably impressive story” is appropriately valued.

NextEra Energy Partners boasts the backing of NextEra Energy Inc (NYSE: NEE), a $70-billion utilities giant, allowing it to sustainably expand operating capacity and payouts to investors.  The company’s 3.6-percent dividend yield is by far the lowest among its direct peer group.

Atlantica Yield (NASDAQ: AY), Brookfield Renewable Partners LP (NYSE: BEP), NRG Yield Inc (NYSE: NYLD), TerraForm Power Inc (NASDAQ: TERP) and Pattern Energy Group Inc (NASDAQ: PEGI) all offer yields between 6 percent and 9 percent.

Advanced Energy Industries presents another strong value opportunity, Molchanov said. The company has a free cash flow yield of 9 percent, easily allowing it to pursue multiple cash-funded acquisitions while maintaining steady buybacks.

The company saw revenue grow 39 percent in 2017, but Molchanov projects that rate will halve in 2018 and further slow to 4 percent in 2019. He attributes this to improvement in the industrials segment being counterbalanced by the maturing of the 3-D NAND upcycle.

Advanced Energy Industrials is a “blend of multiple cyclical businesses, whose cycles may or may not cancel each other out at any given time,” the analyst said. 

Price Action

Advanced Energy Industries was trading 3.8 percent higher at $59.74 during Thursday’s mid-morning session.

NextEra Energy Partners was down 1.42 percent at $46.58 and Clean Energy Fuels was plunging 15.36 percent to $3.14. 

Related Links:

RBC Capital Markets: Kosmos Energy Has 25% Upside Ahead

ACES High: A New Clean Energy ETF Arrives

Latest Ratings for AEIS

Date Firm Action From To
Jul 2018 Raymond James Upgrades Market Perform Outperform
May 2018 Cowen & Co. Initiates Coverage On Outperform
May 2018 Citigroup Maintains Neutral Neutral

View More Analyst Ratings for AEIS
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