Technological advancements in recent times have brought down the cost of generating electricity from alternative energy sources and storing the same. In this backdrop, the outlook for the U.S. alternative energy stocks remains favorable as utilities and corporations are increasingly shifting to renewables. However, policy uncertainties in the nation under Trump’s administration have been an overhang on the stocks’ prospects in the near term.
In particular, annulment of the Clean Power Plan last year came as a big shock for the alternative energy industry. On top of that, the imposition of an import tariff on steel and aluminum in March 2018 is also viewed as a hindrance to growth of the industry by analysts. This is because steel and aluminum are widely used as raw materials to construct critical wind turbines, storage and hydroelectric components.
Nevertheless, it is imperative to mention that even after the current administration’s consistent endeavor in reviving the U.S. coal industry, a big part of the corporate sector and many local governments remain committed toward ensuring a cleaner energy environment. The RE100 collaborative global initiative is bringing together many big U.S. companies from different sectors, with a target to source 100% of their electricity from renewable sources.
Moreover, abundant alternative energy sources like wind and hydro give renewables a comparative advantage over fossil fuels, which is exhaustible. This should keep alternative energy stocks’ momentum alive.
Industry Outperforms S&P 500 and Sector
Looking at shareholder returns over the past year, it appears that Trump’s hostile stance towards renewables failed to dent investors’ confidence in the alternative energy industry. New onshore wind capacities, such as multi-year federal tax incentives combined with renewable portfolio standards remain major growth drivers of these stocks. Moreover, rapid expansion in the nation’s offshore wind capacities, as majority of the electricity demand comes from coastal areas, is also commendable.
In particular, with wind power generating maximum renewable electricity in the United States, it does not come as a surprise that the nation is the largest and fastest growing wind market worldwide. According to U.S. Energy Information Administration’s (EIA) forecasts, wind generation will rise 8% in 2018 and 4% in 2019 from 2017. Such solid growth prospectsencourage investors to bet on alternative energy players.
The Zacks Alternative-Other Industry, which is a 15-stock group within the broader Zacks Oils-Energy Sector, has outperformed both the S&P 500 and its own sector over the past year.
While the stocks in this industry have collectively rallied 25.6%, the Zacks S&P 500 Composite and Zacks Oils-Energy Sector have gained 16% and 11.8%, respectively.
One-Year Price Performance
However, it’s worth noting that there has been a moderate lack of synchronization in the performance of individual stocks within the group. While the stocks that deal with wind projects and well-known renewable energy companies like NextEra Energy Partners (NEP - Free Report) and Statoil ASA (EQNR - Free Report) significantly outperformed the industry, thereby boosting the group’s return, share prices of a few players in this space witnessed a notable decline. The performance of the stocks that declined may have been influenced by the fact that the majority of them are involved in energy sources like biofuels that are not as widely accepted as wind and hydro yet.
Alternative Energy Stocks Trading Cheap
Impressively, even after delivering an outperformance over the past year, the valuation of this industry still looks cheap. One might get a good sense of the industry’s relative valuation by looking at its enterprise-to-EBITDA ratio (EV/EBITDA), which is an appropriate multiple for valuing investment-oriented stocks like alternative energy.
This ratio essentially measures a stock’s current market value, including its debt, relative to its earnings value, before interest, taxes, depreciation and amortization.
The industry currently has a trailing 12-month EV/EBITDA ratio of 3.5. The space looks inexpensive when compared with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.99 and the median level is 11.57.
Enterprise Value-EBITDA Ratio (TTM)
Also, a comparison of the group’s EV/EBITDA ratio with that of its broader sector ensures that the group is trading at a decent discount. Both the Zacks Oils-Energy Sector’s trailing 12-month EV/Sales ratio of 6.21 and the median level of 6.68 for the same period are way above the Zacks Solar Industry’s respective ratios.
Enterprise Value-EBITDA Ratio (TTM)
Outperformance May Continue Due to Strong Earnings Outlook
Currently electricity is the fastest-growing form of end-use energy. Renewables is likely to become a major source for electricity generation in the coming years. Considering this and the fact that the United States is a leading player in the alternative energy industry, rapidly increasing corporate investments from the nation in renewables should allow stocks in the space to continue generating positive shareholder returns in the near future.
But what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead. While the above ratio analysis shows that there is a solid value-oriented path ahead, one should not really consider the current price levels as good entry points unless there are convincing reasons to predict a continuance of such outperformance in the near term.
One reliable measure that can help investors understand the industry’s prospects for a solid price performance is the earnings outlook for its member companies. Empirical research shows that a company’s earnings outlook significantly influences the performance of its stock.
One could get a good sense of a company’s earnings outlook by comparing the consensus earnings expectation for the current financial year with the last year’s reported number, but an effective measure could be the magnitude and direction of the recent change in earnings estimates.
Impressively, the consensus estimate for the Zacks Alternative Energy-Other industry of $1.72 per share implies a decent year-over-year improvement and so does the trend in earnings estimate revisions.
Price and Consensus: Zacks Alternative Energy-Other industry
Looking at the aggregate earnings estimate revisions, it appears that analysts have gained confidence in this group’s earnings potential lately.
The consensus EPS estimate for the current fiscal year has been revised 1.2% upward since Aug 31, 2018.
Current Fiscal Year EPS Estimate Revisions
Zacks Industry Rank Indicates Growth Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term.
The Zacks Alternative Energy-Other industry currently carries a Zacks Industry Rank #111, which places it at the top 43% of more than 250 Zacks industries. 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.
Our proprietary Heat Map shows that the industry’s rank has continually improved over the past five weeks.
Alternative Energy Stocks: Promising Revenues & Earnings Trends
Realizing the need for a cleaner energy environment, consumers have rapidly increased the adoption of alternative energy sources, primarily wind power, in the last couple of years. This in turn has been reflected in the industry’s impressive top-line performance, which has been encouraging since the beginning of 2017.
The top-line growth can be attributed to technological advancements, which lead to faster electricity generation from renewables. The bottom line, in turn, is driven by higher revenues and lower costs for renewable technologies.
China’s emergence as a global leader in clean energy projects, with the nation lately making substantial investments in wind power, poses serious threat to U.S. based operators. On top of that, it is difficult to generate large volumes of electricity from renewable sources compared with traditional fossil fuel generators.
Nevertheless, given its favorable industry rank and price performance history, investors may take advantage of the cheap valuation and bet on a few alternative energy stocks that have a strong earnings outlook. Also, there are a few players in this space that shareholders might want to hold on to.
Dominion Midstream Partners, LP (DM - Free Report) : The Zacks Consensus Estimate for this Richmond, VA-based company indicates year-over-year improvement of 14.81%. Moreover, the current year EPS estimate has moved up 3.9% in the past 60 days. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: DM
Gevo, Inc. (GEVO - Free Report) : The loss estimate for this Englewood, CO-based renewable chemicals and advanced biofuels company indicates 67.1% year-over-year improvement. Moreover, the estimate has been revised 39.7% higher in the past 90 days. It carries a Zacks Rank #2 (Buy).
Price and Consensus: GEVO
Covanta Holding Corp. (CVA - Free Report) : The consensus EPS estimate for this New Jersey-based Energy-from-Waste and renewable energy company indicates 116.2% year-over-year improvement. Moreover, the estimate has been revised 50% higher in the past 90 days. It holds a Zacks Rank #3 (Hold).
Price and Consensus: CVA
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