FPL's Tactical Shift To Solar And Cost Savings Propel Revenue And Margin Growth

Key Takeaways

• Strategic investments in solar and battery storage by FPL are set to reduce fuel costs and improve net margins through operational efficiencies.
  
• NextEra Energy's partnership with Google to develop new renewables projects indicates potential for future revenue growth and market diversification.
  
• Regulatory changes, supply chain issues, and competition in renewable energy affect NextEra Energy's earnings, costs, and market position.

Catalysts

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

• FPL's smart capital investments in low-cost solar generation and battery storage are expected to significantly lower fuel costs, directly improving net margins through operational efficiencies.
  
• The focus on continuous improvement and productivity, demonstrated by the record $460 million of run rate cost savings opportunities identified through Project Velocity, is likely to enhance net margins by reducing operational expenses.
  
• The expected demand growth, driven by Florida's population increase and commercial expansion, should positively impact revenues as FPL's regulatory capital employed has grown faster than anticipated, indicating a robust investment in infrastructure to support this growth.
  
• Energy Resources' strategic positioning to meet both replacement cycle demand (retiring less efficient generation for renewables) and new growth cycle demand (due to increased power requirements across sectors) suggests a significant potential for revenue growth from new renewable projects.
  
• The partnership with Google, resulting in over 3,000 megawatts of new renewables and storage projects, not only highlights NextEra Energy's competitive advantage in meeting the power demand from large commercial customers but also suggests potential future revenue growth and diversification into high-demand sectors.

Assumptions

• Analysts are assuming NextEra Energy's revenue will grow by 9.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.4% today to 25.3% in 3 years time.
• Analysts expect earnings to reach $8.5 billion (and earnings per share of $4.09) by about August 2027, up from $6.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.3x on those 2027 earnings, down from 24.9x today. This future PE is greater than the current PE for the US Electric Utilities industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 1.56% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.8%, as per the Simply Wall St company report.

Risks

• Increased usage of FPL's reserve amortization faster than anticipated could lead to financial stress if not managed properly, potentially affecting earnings if recovery in rate case filings does not meet expectations.
  
• The potential for regulatory changes or delays in rate case approvals poses a risk to expected revenue and net margins from planned capital investments and cost recovery efforts.
  
• Supply chain challenges, including those from reliance on specific regions or manufacturers for renewable technology components, could lead to increased costs or delays in project execution, negatively impacting earnings.
  
• Competition in the renewable energy sector is intensifying, which could lead to pressure on pricing and margins, affecting net earnings and market share.
  
• Fluctuations in interest rates could impact financing costs for capital-intensive projects, thereby affecting net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of $81.12 for NextEra Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $102.8, and the most bearish reporting a price target of just $46.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $33.7 billion, earnings will come to $8.5 billion, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 5.8%.
  
• Given the current share price of $76.68, the analyst's price target of $81.12 is 5.5% higher. The relatively low difference between the current share price and the analyst consensus 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.