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Wells Fargo, Guggenheim see M&A opportunity, renewables growth for NextEra

Following meetings with management, two brokerages believe NextEra Energy Inc.'s current valuation does not reflect its strong fundamental outlook.

"We do not think shares adequately reflect the likely sustainability of NEE's 8%+ EPS CAGR well beyond the company's '18-21 forecast period," Wells Fargo Securities LLC analysts said in an Oct. 10 investor note.

In support of this, the Wells Fargo analysts cited growth in renewable energy that is supportive of earnings growth into the next decade. According to them, NextEra Energy comes out on top in terms of cost of capital, buying power, market intelligence and pipeline within the renewables industry.

"Things can change, but at this point it is difficult to see how the competition bridges [NextEra Energy's] protective moat anytime soon," the analysts said.

In a separate investor note Oct. 11, Guggenheim Securities LLC analysts also pointed how the economics of renewables support how the company's yieldco, NextEra Energy Partners, can be a likely "perpetual grower." It is believed that NextEra Energy is committed to the yieldco in the long-term because it is comfortable with its performance and it remains the "key avenue" for the company to monetize renewables assets.

M&A outlook

Aside from renewables growth, Wells Fargo sees NextEra Energy being able to execute utility or asset acquisitions over the next decade. Currently, the company is in the process of acquiring Gulf Power Co., among other Southern Co. assets in Florida.

"Once the Gulf Power transaction is complete, we believe [NextEra Energy] will be open to other transactions that fit the company's criteria with a continued emphasis in the Midwest & Southeast. Such M&A should immediately provide a step-up in EPS while also enhancing the longer-term growth rate," the Wells Fargo analysts said.

Guggenheim analysts also do not see the Southern deal as the end of the company's M&A pursuits. In particular, it still sees the acquisition of Santee Cooper as a viable transaction in the near term. Santee Cooper is known legally as the South Carolina Public Service Authority.

"[W]e aren't confident many bidders remain that can actually compete with NextEra's balance sheet, scale and cost of capital advantage," the Guggenheim analysts added. On the medium-to-longer term, they see the company making deals similar to the Southern transaction.

Given these factors, Wells Fargo raised its price target on NextEra Energy to $200 from $191. Guggenheim also revised its price target, to $197 from $181. NextEra Energy shares closed at $172.75 on Oct. 10.