Rising oil prices could boost NextEra Energy’s stock earnings

As markets prepare to transition into the new cycle created by potential interest rate cuts by the Federal Reserve (Fed), some specific sectors may be more likely to outperform the rest of the market. Investors may turn to energy stocks, especially now that Goldman Sachs analysts have set their expectations for an oil price as high as $100 a barrel this year.

But not all energy stocks are created equal. With direct oil and gas plays like ExxonMobil Co. NYSE:XOM reaching all-time highs, perhaps the run is relatively exhausted after all. However, investors have other ways to take advantage of the energy surge, which is still tied to rising oil prices.

Alternative energy stocks such as NextEra Energy Inc. NYSE: NO could be interesting since more expensive oil makes other energy sources more attractive. After the company reports first-quarter 2024 earnings, arguably the most important release to set the tone for the year, investors may walk away with new expectations for the rest of the year.

Energy Location and Trends: NextEra’s Profit Center

BORN

NextEra Energy

$66.56

+0.36 (+0.54%)

(As of 04/24/2024 ET)

52 week interval

$47.15

▼

$79.10

Dividend yield

3.09%

P/E ratio

6.44pm

Price target

$71.21

Operating in one of America’s fastest growing economies, NextEra serves the Florida market. According to the company’s presentation, after seeing a nearly $800 billion increase in gross domestic product (GDP), NextEra’s primary market allows it to continue growing its revenue.

Over the past 12 months, NextEra segments have shown investors what the future may hold. Florida Power & Light (FPL) reported earnings per share (EPS) of 57 cents, an increase of four cents per share. Energy Resources, the segment responsible for renewable energy in NextEra, saw an EPS decline of 25 cents to 47 cents.

The divergence makes sense when investors note that oil prices have remained below $80 a barrel for the past 12 months, thus making renewable energy sources less attractive. Now that oil could become an issue, NextEra’s renewable energy business could quickly return.

Knowing this is a likely possibility, analysts at Wells Fargo & Co. raised their price targets for NextEra to $85 per share starting in March 2024. The stock will need to rise 28.4% from today’s prices to demonstrate that these projections are correct.

The market voting system

Size matters when it comes to stocks, and markets have chosen NextEra’s $136 billion market capitalization to dominate competitors like Energy Domain Inc. NYSE:D and its much smaller size of $42.4 billion. This selection occurs through the market’s voting system, as seen in the way future EPS projections are valued today.

With a forward price-to-earnings (P/E) ratio of 18x, NextEra shares trade at a 23% premium to Dominion’s 14.7x valuation. There has to be a reason why markets are willing to overpay for NextEra’s earnings rather than Dominion’s, and one reason could be undervalued EPS growth.

Dominion’s primary business is to provide electricity through natural gas, with minimal consideration for renewable energy. Because of this, analysts have forecast the stock’s EPS growth of up to 18.5% this year, while NextEra’s projections show only 7.6%.

However, these projections need updating as changes in energy markets have made investors more willing to pay for renewables. The price action crystallizes this preference, as NextEra has underperformed SPDR Fund Energy Select Sector NYSEARCA: XLE up to 27.6%.

Investors looking to fill the gap created by these bullish valuations, justified by a fundamental breakout, can find one in the company’s financials. Despite a higher inflationary environment in the United States, investors can find safety in NextEra’s 3.1% dividend yield. According to management, dividend per share growth is expected to be around 10% through at least 2026.

Institutions are preparing for this shift in energy source preferences, as institutional inflows of up to $108.6 billion have been recorded for NextEra over the past 12 months. Of course, the growing demand for electricity created by the growth of artificial intelligence and data centers is a sure boost for NextEra’s business. With Amazon.com moving its headquarters to Miami and lots of electricity demand, NextEra’s EPS growth could come from more than just rising oil prices.

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