Is NextEra Energy The Best Electric Utility Stock To Buy Now?

We think that OGE Energy (NYSE:OGE) – a company that provides electric utility services in Oklahoma and western Arkansas and owns midstream assets – is a better pick compared to NextEra Energy (NYSE:NEE)– the largest utility holding company by market cap. OGE stock trades at just 3.3x trailing revenues, compared to 9.3x for NEE. This gap in the valuation makes sense to a certain extent given NEE’s massive holding of green generation assets such as solar and wind energy and its exposure to the promising Florida utility market. However, we believe that the gap in the valuation of both companies will narrow eventually, boding well for OGE stock. Both the companies have seen lower sales in the last year due to the Covid-19 pandemic. But now that nearly half of the U.S. population is fully vaccinated, the economy is rebounding nicely and this should bode well for electricity demand, auguring well for both the companies. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard OGE Energy vs NextEra Energy: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Revenue Growth

OGE Energy’s revenues have declined 6.5% to $2.12 billion between 2017 and 2020. The decline over the recent past can be attributed to the impact of the Covid-19 pandemic and the associated declines in commercial and industrial power demand. However, over the last 12 month period, revenues surged to about $3.4 billion, an increase of about 60% from the 2020 numbers, due to unprecedented and prolonged cold weather in the company’s services areas during February 2021, which resulted in record peak demand which drove up revenues. However, this was a one-off event and didn’t meaningfully benefit OGE’s bottom line, as costs increased in line with revenues.

Looking at NextEra Energy, its total revenue grew from around 8% between 2017 and 2020 to about $18 billion. While sales were impacted by the Covid-19 pandemic in 2020, the revenue growth was driven by the company’s acquisition of Gulf Power – a utility that serves parts of northwest Florida, and modest growth of its renewable generation business and the Florida Power & Light utility. Looking at organic growth alone, NextEra’s revenue growth performance hasn’t really been much better than OGE’s.

2. Operating Margins

OGE Energy’s operating margins increased from around 23.5% in 2017 to about 24.6% in 2020, as the company cut costs at a slightly faster pace compared to the decline in revenues through the pandemic.  However, margins have dipped in the trailing twelve months, as the increase in revenue growth over Q1 2021 due to the extreme cold weather was offset by the surging cost of natural gas and purchased electricity. On the other hand, while NextEra’s operating margins are thicker than OGE’s margins, they have actually trended lower from around 30% in 2017 to about 28.4% in 2020. Over the trailing 12 months, margins have trended down further due to higher costs relating to fuels and purchased power.

The Net of It All

NextEra stock trades at 9x trailing revenues versus just about 3.3x for OGE.  To be sure, NextEra justifies a premium valuation, given that it has over 22 GW of wind and solar generating assets, with another 13 GW of wind and solar in the backlog. These assets could be much more valuable as environmental regulations are getting more stringent, with an emphasis being placed on sourcing power from cleaner sources. NEE could have an edge with the scale and know-how it has developed over the years.

That said, going by the last few years, both NextEra and OGE are actually quite evenly matched in terms of their underlying revenue growth and operating margins performance. In fact, OGE scores better in terms of some metrics that utility investors look for. For instance, OGE offers a dividend yield of about 4.7% versus a yield of under  2% for NEE. Moreover, OGE also intends to divest its midstream assets, repositioning itself as a pure-play electric utility, possibly making its earnings growth much more predictable.

Now, although we believe that NextEra will continue to trade at a higher multiple compared to OGE going forward due to its green energy focus, we think the difference in valuation for both the companies will likely narrow going forward in favor of the more attractively priced candidate, implying better returns for OGE stock.