Amid the global energy crisis, the renewable energy sector is undergoing a phase of accelerated growth. However, the sector's upward momentum could be impeded by the same challenges it faced in 2022.
Before delving into which of the three sector-committed stocks, General Motors Company (GM), NextEra Energy, Inc. (NEE), and Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI), should investors buy, sell, and hold, let's take a closer look at the current state of the renewable energy industry.
Driven by concerns over energy security in the wake of Russia's invasion of Ukraine, the International Energy Agency (IEA) predicts that global renewable power capacity will double over the next five years. The projected capacity is expected to grow by 2,400 gigawatts (GW), 30% higher than the amount forecasted a year ago.
"Renewables were already expanding quickly, but the global energy crisis has kicked them into an extraordinary new phase of even faster growth as countries seek to capitalize on their energy security benefits," said IEA Executive Director Fatih Birol.
Renewable energy is expected to account for more than 90% of the growth in global electricity production over the next five years. As a result, it is anticipated that renewables will become the largest source of electricity, surpassing coal by early 2025. The sector's momentum is driven by increasing demand and long-term incentives.
However, the renewable energy sector's upward momentum could be hindered by the same challenges it faced in 2022. Supply chain disruptions, rising costs, trade policy uncertainties, inflation, increasing interest rates, and interconnection delays resulted in a slowdown in renewable energy growth last year, causing project delays.
The challenges are likely to persist into 2023, creating significant headwinds. Increasing demand could worsen supply chain constraints and interconnection bottlenecks, leading to higher prices and longer project timelines. Additionally, growth could be limited by transmission constraints until capacity is significantly expanded.
Against this backdrop, it seems wise to invest in fundamentally sound stock GM, which could capitalize on the strong industry tailwinds. Alternatively, NEE's consistent performance could make it a hold option. However, it could be wise to steer clear of HASI.
Let us examine the featured stocks in greater depth.
Stock to Buy:
General Motors Company (GM)
GM designs, manufactures, and distributes trucks, crossovers, cars, and automobile parts, and provide software-enabled services and subscriptions. Its segments include GM North America; GM International; Cruise; and GM Financial. It sells its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Baojun, and Wuling brand names.
On April 25, GM and Samsung SDI announced plans to invest more than $3 billion in a new battery cell manufacturing plant, with operations set to begin in 2026. GM Chair and CEO Mary Barra said, "GM's supply chain strategy for EVs is focused on scalability, resiliency, sustainability and cost-competitiveness. Our new relationship with Samsung SDI will help us achieve all these objectives."
She added, "The cells we will build together will help us scale our EV capacity in North America well beyond 1 million units annually."
Moreover, on February 9, GM and GlobalFoundries (GFS) announced a long-term partnership to establish a dedicated capacity corridor for GM's chip supply. This alliance enables GM to achieve its goal of lowering the number of distinctive chips required to power ever-more complicated and technologically advanced automobiles.
By employing this method, chips can be created in greater quantities and are anticipated to provide improved quality and predictability, maximizing the production of high-value content for the end user.
In terms of forward non-GAAP P/E, GM is trading at 4.93x, 64.2% lower than the industry average of 13.76x. The stock’s forward Price/Sales of 0.27x is 67.1% lower than the industry average of 0.83x.
GM’s net sales and revenue increased 11.1% year-over-year to $39.99 billion for the fiscal first quarter that ended March 31, 2023. Its operating income rose 17.4% from the year-ago value to $2.58 billion. Its adjusted EPS came in at $2.21, an increase of 5.7% year-over-year.
As of March 31, 2023, the company’s total assets stood at $267 billion, compared to $264.04 billion as of December 31, 2022.
The consensus revenue estimate of $41.97 billion for the fiscal second quarter ending June 2023 reflects a 17.4% year-over-year improvement. Likewise, the consensus EPS estimate of $1.66 for the ongoing quarter indicates a 45.7% rise year-over-year. Moreover, the company surpassed its consensus revenue and EPS estimates in three of four trailing quarters.
The stock has slumped 1.1% over the past five days to close the last trading session at $32.48.
GM’s positive outlook is apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
GM has a B grade for Growth, Momentum, Sentiment, and Value. It has ranked #20 in the 57-stock Auto & Vehicle Manufacturers industry.
In addition to the POWR Ratings I’ve just highlighted, you can see GM’s ratings for Stability and Quality here.
Stock to Hold:
NextEra Energy, Inc. (NEE)
NEE generates, transmits, distributes, and sells electricity to retail and wholesale clients. The company generates power through wind, solar, nuclear, coal, and natural gas facilities. Additionally, it develops, builds, and manages long-term contracted assets that encompass clean energy solutions.
NEE’s financial expectations for 2023 and 2024 remain unchanged, with adjusted earnings per share expected to be between $2.98 to $3.13 and $3.23 to $3.43, respectively. The company plans to increase earnings by 6% to 8% off the 2024 range, translating to $3.45 to $3.70 for 2025 and $3.63 to $4.00 for 2026.
In terms of forward non-GAAP PEG, NEE is trading at 2.66x, 9.2% lower than the industry average of 2.93x, while the stock’s forward EV/EBITDA multiple of 16.84 is 50.3% higher than the industry average of 11.21.
For the first quarter that ended March 31, 2023, NEE’s operating revenues increased 132.4% year-over-year to $6.72 billion, while operating expenses increased 2.3% from the year-ago value to $3.77 billion. Additionally, adjusted earnings grew 15.3% year-over-year to $1.68 billion, while EPS came in at $0.84, up 13.5% from the prior year’s period.
Analysts expect NEE’s revenue to increase 19.4% year-over-year to $25.01 billion for the fiscal year ending December 2023. The company’s EPS for the current year is expected to grow 7.3% from the previous year to $3.11. Shares of NEE have gained 6.5% over the past year to close the last trading session at $75.39.
NEE has an overall rating of C, translating to Neutral in our proprietary rating system.
NEE has a B grade for Momentum, a C for Stability, and an F for Value. The stock is ranked #30 out of 64 stocks in the Utilities - Domestic industry.
Click here to access additional NEE ratings for Quality, Sentiment, and Growth.
Stock to Avoid:
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI)
HASI provides funding and services to energy efficiency, renewable energy, and other sustainable infrastructure markets. Its projects involve constructing or upgrading buildings and facilities to reduce energy costs using renewable energy sources, such as solar generation and energy storage.
In terms of trailing-12-month non-GAAP P/E, the stock is trading at 12.47x, 57.3% higher than the industry average of 7.93x. HASI’s trailing-12-month Price/Sales of 20.37x is 851.5% higher than the industry average of 2.14x.
HASI’s total expenses increased 36.9% year-over-year to $57.68 million for the fiscal fourth quarter that ended December 31, 2022. Its net loss and loss per share stood at $20.20 million and $0.22, compared to a net income and EPS of $62.82 million and $0.71 in the previous year’s period.
As of December 31, 2022, the company’s cash and cash equivalents came in at $155.71 million, compared to $226.20 million as of December 31, 2021.
For the fiscal second quarter ending June 2023, the company’s EPS is expected to decline 9.1% year-over-year to $0.55. Over the past year, HASI has plunged 37.7% to close the last trading session at $25.93.
HASI’s bleak outlook is reflected in its overall D rating, equating to a Sell in our POWR Ratings system. It has a D grade for Value and Sentiment. The stock is ranked #45 among 47 stocks in the REITs - Diversified industry.
Click here to access HASI’s ratings for Quality, Stability, Momentum, and Growth.
What To Do Next?
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GM shares were trading at $31.76 per share on Thursday morning, down $0.72 (-2.22%). Year-to-date, GM has declined -5.37%, versus a 6.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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