Renewable Energy Investments Propel Growth Amid Market And Regulatory Uncertainties

Key Takeaways

• Committing to renewable energy projects and strategic deployment of excess proceeds into growth investments enhances stability, profitability, and dividend growth.
  
• Development of an 8 gigawatt project pipeline with secured equipment for tax credits likely contributes to long-term revenue and EBITDA growth.
  
• Clearway Energy's growth strategy, involving project development, M&A, and financing, faces risks from execution delays, regulatory changes, and market conditions impacting revenue and CAFD.

Catalysts

Operates in the renewable energy business in the United States.

• Committing to renewable energy projects with strong sponsor support and contractual terms, such as the Luna Valley Solar and Daggett 1 storage projects, likely to increase revenue with long-term, investment-grade contracted revenues, enhancing stability and growth prospects.
  
• Investment in the Pine Forest Solar Plus Storage project near Dallas, which has a diversified and investment-grade customer base, including a major IT company, may boost revenue through contracted solar revenues and provide a balance to the renewable market position in ERCOT, enhancing profitability and revenue reliability.
  
• Execution of new Resource Adequacy contracts with pricing above 2024 to 2026 levels for the gas fleet, likely to increase revenues from the gas fleet, leveraging regulatory reforms that recognize the value of modern, dispatchable gas plants, contributing to higher CAFD per share.
  
• The strategic deployment of excess proceeds from asset sales into accretive growth investments without the need for external capital raising, supporting dividend growth and enhancing net margins through improved financial prudence and investment returns.
  
• Clearway Group’s development of an 8 gigawatt late-stage project pipeline with secured equipment paving the way for tax credits across multiple COD vintages and technologies through 2028, expanding the growth opportunities within a prudent capital allocation framework, likely to contribute to long-term revenue and EBITDA growth.

Assumptions

• Analysts are assuming Clearway Energy's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.2% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $182.3 million (and earnings per share of $1.79) by about August 2027, up from $90.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $221 million in earnings, and the most bearish expecting $121 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 43.5x on those 2027 earnings, up from 34.9x today. This future PE is greater than the current PE for the US Renewable Energy industry at 27.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

Risks

• The reliance on achieving future growth through the development and execution of new projects, such as Luna Valley and Daggett 1, introduces execution risks and potential project delays which could impact expected revenue growth and CAFD projections.
  
• Potential policy changes or regulatory reforms, particularly in the context of renewable energy incentives or the valuation of RA capacity, could adversely affect profitability and the expected contribution of gas and renewable assets to CAFD per share.
  
• The strategic focus on third-party M&A as a growth vector carries the risk of overvaluation or integration challenges that could dilute shareholder value instead of enhancing it, impacting earnings negatively if acquisitions do not perform as expected.
  
• Financing growth investments and future commitments, such as the Pine Forest and Honeycomb projects, hinges on retained CAFD and the issuance of additional corporate debt within target leverage ratios, posing a risk if projected CAFD levels fall short or if capital market conditions become unfavorable, potentially affecting net margins and liquidity.
  
• Operational performance and the ability to secure favorable contracts for RA capacity or renewable energy production hinge on market conditions and regulatory environments that are subject to change, which could result in lower than expected revenues if Clearway Energy is unable to secure contracts at anticipated prices or volumes.

Valuation

• The analysts have a consensus price target of $32.38 for Clearway Energy based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.6 billion, earnings will come to $182.3 million, and it would be trading on a PE ratio of 43.5x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $26.71, the analyst's price target of $32.38 is 17.5% higher.
  
• 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.