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Coronavirus Impacts Dampen Alternative Energy Prospects

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The Zacks Alternative Energy industry can be fundamentally segregated into two sets of companies. While one group is involved in the generation and distribution of alternative energy and electricity from sources like wind, natural gas, biofuel, hydro and geothermal, the other set is engaged in development, design and installation of renewable projects involving these alternative energy sources.

The industry also includes a handful of stocks that offer fuel cell energy solutions, which have gained popularity as an affordable clean energy of late.

Per a report by Bloomberg Green, in 2019, clean energy investment in the United States totaled $55.5 billion, reflecting a 28% increase from the prior year.

Here are the three major industry themes:

  • Among alternative energy sources, wind energy continues to make noticeable progress in the United States. Per the latest Monthly Electric Generator Inventory Report published by the U.S. Energy Information Administration (EIA), the U.S. electric power sector installed nearly 23,000 megawatts (MW) of new generating capacity in 2019, led by wind energy with 9,100 MW of onshore wind installed. Notably, government policies like extended federal Investment Tax Credit (ITC) for offshore wind energy along with extension of production tax credit have boosted overall wind capacity additions, lately. Also, a steadily decreasing input price along with increasing flow of investments from all over the world has been instilling growth in the wind industry. All these factors enabled U.S. project developers to install more than double the amount of wind capacity in the first three months of 2020 than in the first quarter of 2019, despite uncertainty surrounding the COVID-19 pandemic. In spite of the presence of the COVID-19 impact, EIA expects electricity generation from renewable energy sources to rise from 17% in 2019 to 20% in 2020.
     
  • Although the novel coronavirus outbreak started to worsen across the United States in the latter half of the first quarter, the impact was not that lethal for the wind industry at the onset. However, starting from the second quarter of 2020, nationwide lockdowns leading to widespread restrictions in economic activities must have dealt a blow to the wind industry as well. To this end, the American Wind Energy Association’s (AWEA) analysis reflects that COVID-19 is putting an estimated 25 GW of wind projects at risk, representing $35 billion in investment. This includes the potential loss of more than $8 billion to rural communities in the form of state and local tax payments and land-lease payments to private landowners, as well as the loss of over 35,000 jobs, including wind turbine technicians, construction workers, and factory workers. Since it is uncertain as to when the COVID-19 impacts will dissipate, we remain moderately skeptical about the outlook of the U.S. alternative energy industry.
     
  • Trump dealt a blow to the U.S. alternative energy industry by imposing an import tariff of 25% on steel and 10% on aluminum in March 2018. In January 2020, another roundof tariffs was imposed on steel and aluminum derivatives like imported nails, staples, electrical wires and a few more. Steel and aluminum are widely used as raw materials to construct critical wind turbines, storage and hydroelectric components. After 2018’s tariff imposition, GTM Research, MAKE Consulting and Wood Mackenzie collectively calculated that such imposition can push uplevelized cost of energy for U.S. renewable power plants by 3–5%, thereby leading to slightly lowered forecast for project deployments or slightly lowered project returns. Now the extension of such tariffs may weigh heavily on the industry’s growth trajectory.

Zacks Industry Rank Reflects Grim Outlook

The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #177, which places it in the bottom 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential in recent times. Evidently, the industry’s earnings estimates for the current fiscal year have gone down by 9.8% since Mar 31.

Before we present a few alternative energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags S&P 500, Beats Sector

The Alternative Energy Industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year. The stocks in this industry have collectively lost 14.3% while the Oils-Energy Sector has declined 38.9%.The Zacks S&P 500 composite has gained 8.8% in the same timeframe.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 3.36 compared with the S&P 500’s 11.98 and the sector’s 3.96.

Over the last five years, the industry has traded as high as 3.90X, as low as 2.48X, and at the median of 3.49X, as the charts show below.

EV-EBITDA Ratio (TTM)



 

Bottom Line

Lockdown measures following the spread of the virus disrupted normal manufacturing rate of vital clean energy products like wind turbines. As a result, the U.S. alternative energy industry faced moderate supply chain disruptions. Also, there might have been a slowdown in installation activities in some parts of the country in the second quarter to maintain social distancing along with low electricity demand due to dearth of adequate economic activities.

Nevertheless, compared to other energy sources, renewables are resilient to lower electricity demand because renewable power are generally dispatched before other electricity sources due to their cost effectiveness as well as regulations that give them priority. It is this resilience of the industry that has set it apart from other energy sources in this crisis situation.

Therefore, investors may bet on a few alternative energy stocks that exhibit strong long-term earnings prospects. Also, there are some players in this space that shareholders might want to hold on to.

Here we present four alternative energy stocks with a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) that investors may want to invest in or retain for the time being. You can see the complete list of today’s Zacks #1 Rank  stocks here.

Ameresco Inc. (AMRC - Free Report) : This Framingham, MA-based company boasts a solid long-term earnings growth rate of 17.5%. It came up with trailing four-quarter average surprise of 26.84%. It sports a Zacks Rank #1.

TC Energy Corp. (TRP - Free Report) : This Calgary, Canada-based company boasts a solid long-term earnings growth rate of 4%. It came up with trailing four-quarter average surprise of 5.72%. It carries a Zacks Rank #2.

Bloom Energy Corp (BE - Free Report) : This San Jose, CA-based company boasts a solid long-term earnings growth rate of 25%. It delivered four-quarter average surprise of 75.40%. It carries a Zacks Rank #3.

Evergy Inc. (EVRG - Free Report) : This Kansas City, MO-based company boasts a solid long-term earnings growth rate of 5%. It came up with earnings surprise of 2.5% in the last reported quarter. It carries a Zacks Rank #3.

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