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Wind Power to Lift Alternative Energy Space in the Near Term

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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 the latest Global Trends in Renewable Energy Investment report, 2017 marked the eighth year in a row in which global investment in renewables exceeded $200 billion. Since 2004, the world has invested $2.9 trillion in green energy sources.

Here are the industry’s three major themes:

  • Among alternative energy sources, wind energy has made commendable progress in the United States lately. Per American Wind Energy Association’s latest report, the U.S. wind industry added 7,588 megawatts (MW) in 2018 and another 841 MW in the first quarter of 2019. U.S. wind power has more than tripled over the past decade and is the largest source of renewable generating capacity in the nation currently. With increased focus of energy developers on large-scale off-shore wind projects, the recent tax credit extension bills introduced by the U.S. Senate should bode well for growth of the U.S. wind space. With projections that wind power is slated to surpass hydropower as the U.S. grid’s largest source of renewable electricity in 2019, the outlook for the alternative energy industry seems favorable.
     
  • The outlook for the alternative energy industry is also encouraging as utilities and corporations are increasingly shifting to renewables. This shift can be attributed to lower cost of generating electricity from alternative energy sources and storing the same, thanks to rapid technological advancements. Per International Renewable Energy Agency, cost of all commercially available renewable power generation technologies declined in 2018. By 2020, onshore wind is projected to be a less expensive source of new electricity than the cheapest fossil fuel alternative. This indicates that alternative energy sources can be profitable for industry players. Thus, stocks in this industry should remain prudent choices for investors.
     
  • Per a report by S&P Global Platts, with U.S. states increasingly adopting favorable renewable portfolio standards, existing technologies are not adequate to support their ambitious 100% clean energy goals. In particular, the stakes are high when it comes to transmission costs. Per a report by Wood Mackenzie, the United States currently has about 200,000 miles of high-voltage transmission (HVT) and achieving 100% renewables will require doubling of these transmission lines. The addition of 200,000 miles of new HVT will add $700 billion to the total price of grid decarbonization, excluding the cost of materials.


Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #175, which places it in the bottom 31% 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 dull 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.

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, Outperforms Sector

The Alternative Energy Industry has underperformed the Zacks S&P 500 composite but outperformed its own sector over the past year. The industry has declined 8.1% while the Oils-Energy Sector declined 14.2% in the said time frame. The S&P 500 meanwhile has gained 6.6%.

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 3.4 compared with the S&P 500’s 11.29 and the sector’s 4.94.

Over the last five years, the industry has traded as high as 6X, as low as 1.90X, and at the median of 3.92X, as the charts show below.

EV-EBITDA Ratio (TTM)

 

Bottom Line

Thanks to rapidly declining costs of producing electricity from renewable sources of energy, particularly wind, renewables are likely to become a major source for electricity generation in the coming years. However, details on how to get the last 10-20% of carbon emissions out of the electric grid are not known certainly. 

Moreover, fossil-fuel combustion from residential and commercial buildings accounts for roughly 29% of total U.S. greenhouse gas emissions. So, if the country is determined to build a cleaner environment, cutting down carbon emissions from energy use in buildings is necessary. While smart energy buildings are in vogue currently, reducing emissions from existing buildings remains a challenge.

Nevertheless, increased awareness about clean energy adoption should drive stocks in the U.S. alternative energy space and help them to generate positive shareholder returns in the near future.

Now, let us bet on a few alternative energy stocks that boast a strong bottom-line outlook. Here we present three alternative energy stocks with a Zacks Rank #2 (Buy) that investors may want to invest in for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Evergy Inc. (EVRG - Free Report) : For this Kansas City, MO-based company, the Zacks Consensus Estimate for current-year earnings indicates year-over-year improvement of 8.6%. It came up with a positive surprise of 10% in the last reported quarter.

 

FuelCell Energy, Inc. (FCEL - Free Report) : For this Danbury, CT-based company, the Zacks Consensus Estimate for current-year bottom line indicates year-over-year improvement of 40.7%.

Bloom Energy Corp. (BE - Free Report) : For this San Jose, CA-based company, the Zacks Consensus Estimate for current-year bottom-line figure indicates year-over-year improvement of 57.1%. It came up with average positive surprise of 21.64% in the trailing four quarters.


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FuelCell Energy, Inc. (FCEL) - free report >>

Evergy Inc. (EVRG) - free report >>

Bloom Energy Corporation (BE) - free report >>