The transition to clean energy has been happening for more than a decade now. However, investments in net-zero emissions efforts need to ramp up rapidly to reach the ambitious goal of carbon neutrality. Growth in green energy stocks has been driven largely by government spending, but according to the International Energy Agency, “greater resources have to be mobilized and directed to clean energy technologies to put the world on track to reach net-zero emissions by 2050.”
Last year, the iShares Global Clean Energy UCITS ETF (BIT:INRG) underperformed greatly compared to the broad equity market. INRG dipped 20.5% in 2021, whereas the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) soared 26.9% on the period.
Since then, the beginning of 2022 has been constructive for green energy stocks. Interest in solar energy, wind turbines and nuclear power generation is rebounding. This can be attributed to increasing global political pressure and efforts to secure energy independence amid Russia’s invasion of Ukraine.
In this context, let’s have a look at seven green energy stocks well-positioned to deliver robust returns in the next decade:
- MP Materials (NYSE:MP)
- ON Semiconductor (NASDAQ:ON)
- Dominion Energy (NYSE:D)
- Southern Company (NYSE:SO)
- Duke Energy (NYSE:DUK)
- American Electric Power (NASDAQ:AEP)
- NextEra Energy (NYSE:NEE)
Green Energy Stocks: MP Materials (MP)
MP stock is a producer of rare earth materials, most of which are used in green technologies like electric vehicles (EVs) and wind turbines. The stock posted a weak performance year-to-date (YTD), up only 11% at $50 per share.
However, MP has robust fundamentals. The company delivered a strong net margin of 40.7% in 2021 and is expected to improve it to 49% in 2022.
The materials MP produces are seeing strong demand. For example, neodymium, a key element used to manufacture magnets, saw prices soar in the past month. It reached an all-time high of 1.51 million Yuan per metric ton, a 27.03% year-to-date advance.
Net sales surged 148% last year to $332 million. Going forward, MP is projected to maintain a rapid growth rate of 42% to $472 million in 2022. On the other side, net income is expected to nearly double this year, up 71% to $231 million. It should rise another 41% to $326 million in 2023.
In addition, MP is well-capitalized with an expected $468 million in cash on hand at the end of 2022. On the negative side, the rare earth materials specialist is forecast to hold a negative free cash flow (FCF) of $229 million in 2022 due to surging capital expenditures of $506 million.
Despite a weak YTD stock performance, MP still trades at a high forward Enterprise Value-to-Earnings before Interest, Taxes, Depreciation and Amortization (EV/EBITDA) ratio of 24.8x. Its 2022 price-to-earnings (P/E) ratio is 40.2x.
Yet MP stock is one of the few American players in the strategic rare earth materials industry, and still offers an average target price of $50 per share.
ON Semiconductor (ON)
ON Semiconductor offers intelligent sensing and power solutions worldwide. It chips enable the electrification of the automotive industry, empower fast-charging systems and support the development of sustainable energy.
Since the beginning of the year, ON shares have underperformed the market, dipping 10% to $61 per share. But the company has an attractive profitability level, offering an estimated profit margin north of 20% in the next two years. Net profits are on a positive path, surging in 2021 by 332% to $1.01 billion and expected to advance at a hefty pace of 68% to $1.69 billion in 2022.
On the other hand, after increasing 28% to $6.74 billion last year, revenue growth is projected to decelerate moderately, up 13.5% in 2022 to $7.65 billion.
Nevertheless, ON’s expected net debt is $497 million in 2022, down 71% year-over-year (YOY) and representing a leverage ratio of only 0.17x. With this strong balance sheet, the power solution company has sufficient resources to develop new markets and thrive in the growing green energy sector.
ON stock is cheap compared to other green energy stocks, trading at a 9.6x forward EV/EBITDA ratio and a 16.5x forward P/E ratio. Besides, the consensus of analysts offers a compelling average price target of $72.10 per share, a change of 18% compared to today’s price.
Green Energy Stocks: Dominion Energy (D)
D stock is a producer and distributor of energy in the Eastern and Rocky Mountain regions of the U.S. Its portfolio of assets includes 30.2 gigawatts of electric generating capacity. Dominion shares have outperformed green energy stocks over the year, gaining 3% to just more than $81 per share.
The company is slowly separating from gas generation assets. D has executed a definitive agreement to sell its West Virginia natural gas utility to Ullico for $690 million.
Dominion’s financials are healthy, offering a profit margin of 23.5% in 2021 and an estimated net margin of 20.2x in 2022. The company’s top-line declined marginally in 2021, down 1.5% to almost $14 billion, but it should bounce nearly 18% to $16.4 billion this year. On the other side, net income is projected to flatten, rising by only 1% to $3.3 billion in 2021 compared to 8% top-line growth in 2023.
However, Dominion has excessive leverage. After advancing by 5.6% YOY to $38.9 billion in 2021, net debt is expected to increase another 10.5% this year to $43 billion. With these increases, D stock has an estimated leverage of 5.3x for 2022, well above industry peers.
D shares are currently valued at a 2022 EV/EBITDA ratio of 13.4x and a forward P/E ratio of 19.9x. The mean target price stands at $85.45 per share, corresponding to a 4.8% potential upside in the next 12 months. Besides, D stock provides an attractive dividend yield of 3.3% in 2022. The current level offers a good entry point for shareholders looking to invest in an established green energy stock.
Southern Company (SO)
Southern Company engages in the generation, transmission and distribution of electricity. It also develops and manages gas and power generation assets, including renewable energy projects, nuclear and cogeneration plants. Since the beginning of the year, SO shares were mostly flat, trading at just under $69 per share.
SO delivers less attractive profit margins than other green energy stocks, with a net margin of 10.4% in 2021 and a forecast net margin of 16.3% in 2022. Despite that, revenue surged 13.4% to $23.1 billion in 2021. It’s projected to rise marginally in 2021, up 0.4% to $23.2 billion.
The bottom line of SO stock is projected to climb robustly this year, up 58% YOY to $3.8 billion and 8% in 2023 to $4.1 billion. More interestingly, FCF generation will get a massive boost this year, reaching $1.1 billion compared to a loss of $1.1 billion in 2021.
In terms of balance sheet, Southern Company’s investment strategy is built around maintaining a healthy pace. Capex should rise by 7% in 2022 to $7.8 billion, but net debt remains high, reaching $54.8 billion in 2022 and posting a 5.44x leverage.
SO stock’s valuation trades at a forward EV/EBITDA ratio of 12.7x and a 19.3x forward P/E ratio, slightly above its historical metrics. Nevertheless, according to Wall Street analysts, the upside on SO stock is limited.
The price target stands at $69.08 per share, representing a marginal upside of 0.4%. Despite that, Southern offers a dividend yield of 3.8% in 2022 and is well-positioned to expand its market share in the U.S.
Green Energy Stocks: Duke Energy (DUK)
Duke is one of the largest American electric energy groups with a generating capacity of 51,000 megawatts. The company sells electricity in the Carolinas, Florida and the Midwest, using coal, hydroelectric, natural gas, oil and nuclear sources.
DUK stock posted a tiny YTD performance, advancing 1.8% to $106 per share. Net margins are compelling for this major electric utility, with profit margins reaching 15.1% in 2021 and expected to reach 15.9% in 2022.
The top line of the company is forecast to grow consistently through 2023 at a rate of 4% per year, earning $27.1 billion in 2023. On the other side, net income jumped robustly last year, up 199% to $3.8 billion. That figure is expected to advance another 10.1% to $4.2 billion in 2022.
Analysts expect FCF generation to significantly improve this year, coming in at $1.1 billion compared to a deficit of $1.4 billion in 2021. On the negative side, Duke Energy has an elevated net debt, standing at $66.8 billion in 2021 and forecast to advance to $69.3 billion, corresponding to a leverage ratio of 5.7x.
DUK shares are trading slightly above other green energy stocks, posting a forward EV/EBITDA ratio of 12.4x and a 2022 P/E ratio of 19.5x. The utility offers an attractive dividend yield of 3.7% in 2022. Nevertheless, DUK has an average price target of $110.69, a percentage change of only 3.6% from its current price.
American Electric Power (AEP)
American Electric Power (AEP) is an electric public utility holding company that engages in the generation, transmission and distribution of electricity to retail and wholesale customers in the U.S. AEP shares have outperformed the equity market since the beginning of the year, rising 8% to $96 per share.
AEP’s profitability is expected to slightly improve in the next few years. After posting a profit margin of 14.8% in 2021, analysts expect net margins to reach 15% in 2022 and 15.8% in 2023. Nevertheless, after growing 12.4% YOY in 2021 to $16.8 billion, net sales should remain somewhat flat in the next two years, reaching $17 billion and $17.3 billion in 2022 and 2023, respectively.
More interestingly, FCF is expected to soar this year to $4.2 billion versus an FCF loss of $1.8 billion last year. On the negative side, debt will increase almost 7% to $37.9 billion in 2022, representing an extended leverage ratio of 5.6x.
In terms of valuation metrics, AEP stock trades at a 12.6x 2022 EV/EBITDA ratio and a 19.2x forward P/E ratio. The average target price for AEP is $101.50 per share, a 5.7% increase versus today’s price. Besides, the dividend of AEP is compelling, with an expected yield of 3.3% in 2022.
Green Energy Stocks: NextEra Energy (NEE)
NextEra Energy is a leading clean energy company engaged (through subsidiaries) in electricity generation, transmission and distribution. NEE shares dipped 11% since the beginning of the year to $83 per share.
Despite this poor performance, the company has a strong growth profile. After decreasing 5% in 2021 to $17.1 billion last year, revenue is forecast to surge 29% in 2022 to $22 billion.
NEE stock’s bottom line is anticipated to advance considerably in 2022, up 53% to $5.5 billion in 2022 and rising 11% in 2023 to $6.1 billion. This translates to a potential average profit margin of 26.6% in two years.
Nevertheless, NextEra’s balance sheet is slightly overleveraged, which might constitute a risk as interest rates normalize. Net debt increased 15% to $54.2 billion in 2021 and is expected to rise 13% this year to $61.4 billion, offering a leverage ratio of 4.9x.
This clean energy stock delivered a massive FCF loss of $8.2 billion in 2021, but this number is projected to shrink in 2021 to a deficit of $3.6 billion.
That being said, NEE shares exchange at a stretched forward EV/EBITDA ratio of 17.7x and a 2022 P/E ratio of 29.6x. In addition, it offers an expected dividend yield of 1.9% in 2022. The mean price target is $93 per share in the next year, corresponding to a 12% upside from today’s price.
On the date of publication, Cristian Docan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.