Is NEE Stock Overvalued?

NextEra Energy Inc (NYSE:NEE) is an American energy company that operates in both the United States and Canada. It’s also the largest utility in the state of Florida, a popular retirement spot that’s been experiencing population growth as New York residents among others fled to a sunnier climate.

The demand for more energy triggered investors to flock to a normally boring electric utility stock, with some musing is NEE stock overvalued?

NextEra Energy has plenty of growth opportunities left. It recently bought Gulf Power and is spending up to $28 billion through 2022 to upgrade its infrastructure and enable rate increases. Its 46 gigawatts of power generation is “almost” enough to send several dozen DeLoreans back to the future.

But can NextEra Energy power strong and steady growth for investors?

Why NEE Stock Went Up?

NextEra Energy gained in popularity as residents of other states packed up and moved south to work virtually in warmer climates.

Florida’s favorable tax and housing laws, along with yearlong sunny weather, make it a popular Boomer retirement spot that’s attracting a wave of Generation X’ers who have hung up their working boots so to speak.

On top of that, those still in the workforce are moving there, and because they are working online, demand on the electricity is even higher. Thus, the largest electric company in Florida gained national attention from investors.

In addition to its brand name, it also owns Gulf Power and Florida Power & Light.

The company isn’t just resting on its laurels – it has an aggressive infrastructure upgrade plan through the next three years. It invests in its owned businesses to keep income flow and growth predictable. Utilities aren’t typically attractive for investors as they are slow-growth businesses.

However, its slow and stable growth is exactly what bullish investors want when faced with a volatile economy in 2021.

Most analysts across the board agree it could be 2022 before the world economy gets fully back on track. NextEra Energy is one of few companies with a clear roadmap for the path ahead.

NEE Financials Show Steady Earnings Growth

NextEra Energy beat analyst expectations in every quarter of 2020. This helped the company grow to a market capitalization over $145 billion, with daily trading volume of 13 million shares in December 2020.

Stock prices dropped to a 52-week low of $43.70 at the onset of the coronavirus crash before rebounding to a historic high of $83.34. However, it lost luster in the winter. The share price settled in the $70-$75 range as government stimulus talks stalled.

In fact, it lost 1.02 percent in December while the market declined waiting for more information on vaccination distribution and economic recovery.

The company pulled in $13.6 billion year-to-date as of its third quarter earnings report. This gave it total income of $2.9 billion for those three quarters, or $5.94 earnings per share.

NextEra Energy has power generation assets that include coal, natural gas, oil, nuclear, wind, solar, and landfill gas, providing it with a diverse range of revenue streams that covers the gamut for those who can’t decide which one to invest in.

However, with the company spending as much as $28 billion on infrastructure upgrades and other players in the same game, bearish investors fear it may be trading too high.

Is NEE Valuation Too High?

According to consensus estimates from analysts, NEE has a fair market value of $78.57 per share. This is primarily based on a discounted cash flow analysis. Prices below that level suggest there is still upside in NEE share price.

Despite its status as a utility, investors should pay attention to just how volatile the stock has been historically. Long-term holders can ride out the swings but short-term traders should pay close attention to the seasonal demands on electricity, although Florida’s more consistent weather makes things easier to forecast.

Of course, there are also hurricanes to consider. When storms do hit in Florida, they can be legendary enough that you know their first name. These hurricanes can wreak havoc on the electrical grid, which is still connected through a series of cables on poles high above the ground.

Power lines are dangerous in a storm, and Florida has a lot of swampland. This makes the company a hazardous one that could be too much risk for some investors to stomach, especially during the late-summer hurricanes.

Will NEE Stock Drop?

NEE stock will certainly drop. It had a downswing for much of October and December. However, this gives new buyers an opportunity to enter on the dips and maximize investment gains. If you look back over prior years you can spot a seasonal pattern in share prices too.

Other causes for NextEra Energy to dip include competitive pressurs from the likes of NRG Energy, Southern Company, Ameresco, American Electric Power, and more. Each regional electric utility has the same basic assets and revenue streams as NextEra.

Each of these utilities is spending in much the same way on infrastructure upgrades. And each state, city, and county have their own laws regulating electric companies. This creates a more uncertain investing environment.

This means buyers need to note that they will be investing in a volatile stock that may have plenty of ups and downs, although it generally trended up in both 2020 and the prior five years leading up to it.

Is NEE Stock Overvalued? The Bottom Line

NextEra Energy is a regional electric utility that gained national attention for operating in a hot spot destination for residents fleeing lockdowns in other states – Florida. Because it has the same climate year-round and favorable taxes, many Boomers and Gen X retirees are migrating to the Sunshine State.

This, in turn, boosted the electric utility’s revenue and income. Investors flocked to it and drove the price up, as it’s a relatively safe bet for slow, stable growth in an uncertain 2021 and 2022.

It’s not the only utility company on the block though. There are 49 other states and major utility companies serving them. Each has the same assets and roadmap. You may find a better fit for your portfolio.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.