Why NextEra Energy Stock has more downside

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After a share price decline of 17% since the start of the year, shares of NextEra Energy (BORN) are now trading at a significant discount to the end of 2021. However, this is not enough to trigger a buy position now, in my opinion.

With the stock price falling from the $80-$81 resistance level on its chart, NextEra Energy stock may still not be cheap despite its loss since the start of the year.

NEE has major operations in Florida and is a profitable electric utility company with growth potential. However, since the goal of investing in stocks is to take advantage of this growth potential through share price appreciation, I would buy stocks when they reach the low end of their range. recent trading, around $68-70 per share, to maximize gains. Therefore, I am bearish on the short-term stock.

In addition to operating in the electric utility sector, NEE is also active in wind and solar power generation and battery storage, operating as a global leader.

The company generates zero-emission electricity from seven commercial nuclear power plants located in Florida, New Hampshire and Wisconsin.

Why NEE Stocks May Fall Further

NEE’s share price is affected by fluctuations in the price of electricity. With that in mind, I anticipate that the stock price could drop significantly between late August and mid-October, also due to continued headwinds in the market.

At the end of August, the hottest time of the year in Florida is over and people will be using less energy to cool their homes/environments. The mix will lower the price of electricity per kilowatt hour (kWh) and may negatively affect the NEE stock.

NextEra Energy’s 14-day Relative Strength Index (RSI) of 49 suggests that if the stock price wants to drop further, there is still plenty of room.

The indicator ranges from 30 to 70. A reading of 30 means a stock is oversold, while a reading of 70 means a stock is overbought.

Q1-2022 results: higher revenues with lower sales

In the first quarter of 2022, NextEra Energy reported earnings per share (EPS) of $0.74, a 10.5% year-over-year increase, on total revenue of nearly $2.89 billion dollars, nearly 23% less than last year. Q1-2022 EPS exceeded analysts’ average estimate by $0.02.

NextEra Energy reiterated its strong long-term focus

Looking ahead to 2022, the company reiterated its EPS guidance of between $2.75 and $2.85 compared to EPS of $2.55 for the full year 2021. Analysts’ average estimate for this year is $2.86.

Additionally, the company has the following EPS expectations through 2025:

  • an increase of 6.6% to 8.1% from 2022 to a range of $2.93 to $3.08 in 2023.
  • an increase of 6.8% to 8.1% from 2023 to a range of $3.13 to $3.33 in 2024.
  • an increase of 7% to 8.1% from 2024 to a range of $3.35 to $3.60 in 2025.

Meanwhile, analysts estimate that NextEra Energy will grow its EPS by 7.7% in 2023 and around 8.7% annually in 2024 and 2025.

The company’s growth forecast is based on a solar portfolio totaling 3,600 megawatts and a backlog of wind projects for commercial operations in 2022 and beyond. The company is also developing solar and battery storage projects.

NEE’s balance sheet is weak but could improve

NextEra Energy has a relatively weak balance sheet which needs to be strengthened if it is to continue to develop its low-cost solar projects and its portfolio of renewable energy and storage projects.

However, if operations continue to perform as well as in the first quarter of 2022, the company’s financial situation is on track to improve.

As of March 30, 2022, total cash and cash equivalents stood at $1.5 billion, nearly 40 times less than its total debt of $59.7 billion, raising concerns about the overall financial health of the company.

The interest coverage ratio, which determines how easily a company can pay interest costs on total outstanding debt, stands at around 1x for NextEra Energy.

Since the ideal value should be 1.5 or higher for a company to be deemed able to support its financial burden, NextEra Energy may experience difficulty in meeting its financial obligations.

NextEra Energy’s interest coverage ratio is calculated by dividing its TTM operating income of $1.56 billion by TTM interest expense of $1.55 billion.

Additionally, NextEra Energy has a debt to EBITDA ratio of 9.9 as of March 2022, calculated as total debt of $59.7 billion divided by EBITDA of $6.03 billion, meaning that its debt is about 10 times its annual earnings before interest, taxes, depreciation and amortization.

Wall Street’s view on NEE stocks

Over the past three months, 14 Wall Street analysts have released a 12-month price target for NEE stocks. NextEra Energy has a moderate buy consensus rating based on nine buys, four takes and no sell ratings.

The average price target for NEE is $89.69, implying an upside potential of 15.7%.

Appraisal is not cheap

The shares are changing hands at $77.51 at the time of writing for a market cap of $152.2 billion and a price-to-earnings ratio of 104.6x. Additionally, its price-to-book ratio is 4.2x, and its price-to-sales ratio is 9.4x.

Next, the stock is trading above its 50-day moving average of $75.42 and slightly below its 200-day moving average of $80.88. Therefore, the stock does not look cheap.

NEE’s enterprise value to EBITDA ratio is 33.9x, while its enterprise value to revenue ratio is 12.6x. These two financial indicators lead to an EBITDA margin of 37.1%, which is above the industry median of 33%, indicating that NextEra Energy’s business is more profitable than most of its competitors.

The company has good growth prospects, but it’s probably best to delay buying shares until they’re trading significantly lower than current levels to make the most of the upside potential. I expect the company to trade lower between late August and mid-October.

Additionally, the stock price is likely to offer a more attractive dividend yield than the current rate of 2.06%, which is only 44 basis points above the S&P 500 (SPX) yield of 1.62%. Nevertheless, the company has paid dividends for 32 consecutive years and increased them for 27 consecutive years.

Conclusion – NEE works efficiently, but a better entry point may come

NextEra Energy has good growth potential, but it’s probably a buy to postpone until after the summer season, as the stock price should become more affordable than it is today.

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