Four Favorite Utilities for Renewable Exposure

10/19/2020 5:00 am EST

Focus: ENERGY

Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

More than two-thirds of new power generation capacity installed worldwide this year was wind and solar, explains Roger Conrad, editor of Conrad's Utility Investor.

So what electric utilities feature the most attractive energy technology adoption opportunities now? The most attractively priced are Edison International (EIX) and Duke Energy (DUK), which trade at just 11.8 times and 16 times expected 2020 earnings respectively.

Edison is cheap because of understandable concern about the durability of California’s new utility wildfire insurance in a season of record heat. But that risk is more than offset by the low price, which in no way reflects the massive rate base opportunity this company has in its power grid.

The utility’s most recent earnings news was actually an increase in the lower-end of its 2020 guidance range, which at the mid-point now covers the payout by nearly 2-to-1.

You could speculate on which car company will sell the most EVs. Or you could lock in growth from EV adoption with Edison International.

The California utility recently won regulators’ approval for the largest build of EV charging stations and energy storage in US history. And while Tesla (TSLA) sells for 17 times annual sales that shrank -5 percent this year, Edison sells for just 11.2 times earnings and pays a yield of nearly 5 percent.

As for Duke, there’s uncertainty about how much North Carolina regulators will approve of its planned investment on power grid improvement and coal ash cleanup.

But this company has more than enough balance sheet strength and diverse revenue streams to handle the worst case scenario investors appear to be pricing in. And arguably no US utility has a bigger opportunity to rate base solar. Buy up to $90.

As for companies combining contracted renewables with regulated utilities, the best in class is NextEra Energy. But the best buys are Algonquin Power and Utilities (AQN) for the most conservative, and AES Corp. (AES) for everyone else.

AES owns one of the California natural gas power plants that won an extension to operate to 2023. But the real appeal is an unrivaled global pipeline of new wind and solar generation along with energy storage that’s expected to grow earnings and free cash by at least an upper single digit rate the next few years.

The utility also earns an investment grade rating from S&P by the end of 2020. AES shares are now up nearly 30 percent since July, but at just 12 times expected 2020 earnings and getting stronger every day, it’s still a buy up to $22.

As for Algonquin, new management looks set to continue the roughly two-thirds utility, one-third contracted renewables earnings and growth strategy.

The latest move on the unregulated side is a co-development deal to power Chevron (CVX) operations with wind and solar, with an initial target of 500 megawatts. That’s an exceptionally low risk deal with the super major oil the only counterparty. Buy at $14 or lower.

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