Renewable And Gas Projects Will Encounter Hurdles But Expand

Key Takeaways

• Regulatory challenges and supply chain constraints may disrupt renewable projects, affecting revenue growth expectations.
  
• Increased costs in gas-fired generation and interest rate fluctuations could compress net margins and impact earnings growth.
  
• Strategic investments in infrastructure, partnerships, and Florida demographics position NextEra for revenue growth, while strong financials and stable rates support profitability.

Catalysts

Through its subsidiaries, generates, transmits, distributes, and sells electric power to retail and wholesale customers in North America.

• NextEra Energy's heavy reliance on renewable projects that require timely execution may be disrupted by regulatory challenges and supply chain constraints, potentially reducing expected revenue growth.
  
• The significant increase in costs associated with gas-fired generation, including turbine prices and EPC labor, could compress net margins as NextEra Energy tries to expand capacity and meet rising demand.
  
• Delays in the deployment of natural gas-fired power generation until at least 2030 may impact revenue streams and growth expectations aligned with current high energy demand, resulting in a more expensive mix of interim power sources.
  
• With potential interest rate fluctuations impacting their hedging strategy, higher borrowing costs could result in lower profits as financial expenses increase, affecting earnings growth projections.
  
• Pending regulatory adjustments and rate case reviews related to base rates starting in 2026 introduce uncertainty, possibly limiting the anticipated regulatory capital growth and thereby impacting future revenue visibility.

NextEra Energy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NextEra Energy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NextEra Energy's revenue will grow by 6.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 28.1% today to 29.0% in 3 years time.
• The bearish analysts expect earnings to reach $8.7 billion (and earnings per share of $4.16) by about April 2028, up from $6.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, up from 19.4x today. This future PE is lower than the current PE for the US Electric Utilities industry at 20.3x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

NextEra Energy Future Earnings Per Share Growth

Risks

• NextEra Energy's continuous investment of $120 billion over the next 4 years in its energy infrastructure, including renewables and storage, positions the company for potential revenue growth through expanded capacity and operational scalability.
  
• Florida's population growth rate is expected to be 60% above the national average by 2030, suggesting increased demand for electricity, which can positively impact NextEra’s revenue from Florida Power and Light’s customer base.
  
• NextEra's strategic partnerships, such as the collaboration with GE Vernova for natural gas power generation solutions, might enable it to offer comprehensive energy solutions, potentially enhancing revenue through diversified service offerings.
  
• With a robust balance sheet and an expected average annual growth rate in regulatory capital employed of roughly 10%, NextEra could maintain strong financial performance and profitability by efficiently financing its growth initiatives.
  
• The multiyear settlement agreements at FPL that provide rate stability may help maintain net margins, supported by Florida’s strong economic growth and the ability to pass on the benefits of higher service reliability and lower customer bills through base rate recoveries.

Valuation

• The assumed bearish price target for NextEra Energy is $71.31, which represents one standard deviation below the consensus price target of $83.27. This valuation is based on what can be assumed as the expectations of NextEra Energy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $103.0, and the most bearish reporting a price target of just $52.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $30.1 billion, earnings will come to $8.7 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $65.64, the bearish analyst price target of $71.31 is 8.0% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.