After Gaining 25% YTD, Is The Rally In Hannon Armstrong Stock Over?

by Trefis Team
Exxon Mobil
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After a 25% rise since the beginning of this year, at the current price of $39 per share we believe Hannon Armstrong stock (NYSE: HASI) has reached its near-term potential. HASI stock has rallied from $31 in January to $39 at present, compared to the S&P 500 which gained just 3%. The stock has outperformed broader markets primarily due to 40% growth in revenues and earnings during H1. Hannon Armstrong Sustainable Infrastructure Capital invests in green energy projects and energy efficiency solutions. The company’s $2.1 billion portfolio includes debt investments in government & private projects, real estate assets, and equity holdings. Also, the stock has nearly doubled since 2017 due to an expanding asset base, improving returns on equity, and a rising dividend per share.

HASI stock has continuously trended upwards despite the coronavirus pandemic disrupting nearly every sector of the economy. The company benefited from rising interest income and growing equity returns in H1. Due to a prolonged slump in conventional crude oil and natural gas demand, the renewable energy industry has been gaining interest among investors and business professionals. Thus, HASI’s trailing P/E multiple zoomed from 21.5 at the end of 2019 to 27.2 at present. However, we believe that the stock is overvalued and could decline as oil & gas demand grows along with the easing of state-imposed restrictions. Our interactive dashboard What Factors Drove 89% Change in HASI Stock between 2017 and now? has the underlying numbers.

Looking at the fundamentals, HASI’s revenues observed a 33% jump from $106 million in 2017 to $142 million in 2019, which has translated into similar growth in net income margin due to rising returns from equity investments. Thus, the P/E multiple has also consistently improved. However, the heightened interest in renewable energy in the past six months has led to a surge in HASI’s trailing P/E multiple and we believe the stock could observe a correction in the near-term.

So what’s the likely trigger and timing for a downside?

Despite major oil producers such as BP shifting its capital allocation strategy toward new energy and future mobility solutions, global crude oil production is expected to decline by just 10% in 2020. Along with BP, other oil producers including Royal Dutch Shell and Exxon Mobil expect crude oil prices to remain under $50/bbl even in 2021. Thus, renewable energy projects are likely to face stiff competition from conventional oil & gas due to low benchmark prices. While the slump in crude oil demand is likely to remain in the near-term, a sharp fall in commercial crude oil inventories in Q3 could trigger this downside.

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