Per the U.S. Energy Information Administration’s (EIA) latest short-term energy outlook, electricity produced from renewable sources is projected to rise from 22% of total generation in 2022 to 24% in 2023 and 26% in 2024. This should bolster alternative energy stocks’ prospects. However, the United States still lags its Asian and European counterparts when it comes to government funding for the adoption of hydrogen in electricity generation. Nevertheless, EV market boom remains a key growth catalyst for the alternative energy industry. The forerunners in the U.S. alternative energy industry are Vestas Wind Systemes VWDRY, Clearway Energy CWEN and Bloom Energy BE.
About the Industry
The Zacks Alternative Energy industry can be fundamentally segregated into two sets of companies. While one group is involved in the generation and distribution of alternative energy and electricity from sources like wind, natural gas, biofuel, hydro and geothermal, the other set is engaged in the development, design and installation of renewable projects involving these alternative energy sources. The industry also includes a handful of stocks that offer fuel cell energy solutions, which have gained popularity as an affordable clean energy of late. Per a report by the U.S. Energy Information Administration, 24% of U.S. utility-scale electricity generation came from renewable sources in the first half of 2022.
3 Trends Shaping the Future of the Alternative Energy Industry
Wind Energy – A Key Growth Catalyst: Among alternative energy sources, wind energy continues to make noticeable progress in the United States. Per EIA’s latest short-term energy outlook report, electricity produced from renewable sources is projected to rise from 22% of total generation in 2022 to 24% in 2023 and 26% in 2024. These gains will be partly driven by about 13 GW of wind capacity that will come online during 2023-204. This reflects the rapid growth pattern observed in the wind energy industry, which must have encouraged EIA to make such a solid projection. An increasing flow of investments from all over the world has been instilling growth in the wind industry. The U.S. Department of Energy (DOE) announced in February 2022 that it is offering a $30 million funding opportunity to advance the cost-effective domestic manufacturing of materials, including lightweight composites, which allow wind turbines to produce power more efficiently. This reflects a solid opportunity for the U.S. wind market currently, which, in turn, should boost the overall expansion of the alternative energy industry.
Persistant Lag in H2 Investment: Government and industry investment in hydrogen as an energy carrier adds up to $2 billion per year in Asia and the European Union, as stated by a report sponsored by major oil companies, automakers, hydrogen producers and fuel cell manufacturers and released by Greentech Media in October 2020. However, the Biden-Harris Administration, through the U.S. Department of Energy (DOE), announced in December 2022 its intent to issue $750 million in funding from President Biden’s Bipartisan Infrastructure Law to dramatically reduce the cost of clean-hydrogen technologies. This, although higher than the prior plan to spend $28 million in federal funding for research and development and front-end engineering design projects, remains much lower than the amount invested by its Asian and European counterparts.
EV Market Boom to Boost Clean Energy: With enhanced environmental awareness, more and more individuals are choosing to switch from gasoline-powered vehicles to electric vehicles (EVs) each year, thereby boosting the market for EVs. In the United States, favorable government policies and support in terms of subsidies and grants, tax rebates and other non-financial benefits in the form of car pool lane access along with declining battery prices have been boosting the EV market. The U.S. EV market is expected to reach 6.9 million unit sales by 2025, reflecting a significant improvement from the 1.4 million unit sales forecast for 2020, as estimated by Frost & Sullivan’s analysis. Such an impressive outlook surely bolsters the prospects of clean energy stocks, which offer the largest electric vehicle charging network in the United States.
Zacks Industry Rank Reflects Grim Outlook
The Zacks Alternative Energy industry is housed within the broader Zacks Oils-Energy sector. It carries a Zacks Industry Rank #184, which places it in the bottom 27% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is due to a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have lost confidence in this group’s earnings growth potential over the past few months. The industry’s earnings estimate for the current fiscal year has gone down 14% to $1.72 since Nov 30.
Before we present a few alternative energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats S&P 500, Lags Sector
The Alternative Energy Industry has outperformed the Zacks S&P 500 composite but underperformed its sector over the past year. The stocks in this industry have collectively gained 4.9%, while the Oils-Energy Sector has risen 16.6%. The Zacks S&P 500 composite has lost 8.9% in the same timeframe.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is commonly used for valuing alternative energy stocks, the industry is currently trading at 8.82 compared with the S&P 500’s 12.22 and the sector’s 3.23.
Over the last five years, the industry has traded as high as 9.59X, as low as 8.11X, and at the median of 8.83X, as the charts show below.
EV-EBITDA Ratio (TTM)
3 Alternative Energy Stocks to Watch
Clearway Energy: Based in San Francisco, CA, this company owns and operates a diversified portfolio of contracted renewable and conventional generation, along with thermal infrastructure assets in the United States. In January 2023, Clearway Energy’s 36-megawatt (MW) solar farm with 144 MWh of battery storage on Kamehameha Schools’ lands in Waiawa in Central O‘ahu achieved commercial operations after passing all its necessary commissioning tests. The site will generate enough clean electricity to power more than 7,600 homes each year. This should boost CWEN’s position in the renewable energy market.
The Zacks Consensus Estimate for Clearway Energy’s 2022 earnings implies an improvement of 400% from the 2021 reported figure. The company delivered an earnings surprise of 115.38% in the last reported quarter. CWEN currently sports a Zacks Rank #1 (Strong Buy).
Price & Consensus: CWEN
Vestas Wind Systems: Based in Denmark, Vestas Wind Systems is engaged in the development, manufacture, sale, and maintenance of wind technology. In February 2023, Vestas received a 68 MW order from Dirkshof Estonia OÜ to power the Aidu project in Estonia. The order includes the supply, installation, and commissioning of 15 V150-4.5 MW turbines, as well as a 20-year Active Output Management 5000 (AOM 5000) service agreement.
The Zacks Consensus Estimate for VWDRY’s 2022 earnings implies an improvement of 123.5% from 2021’s reported sales figure. VWDRY currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: VWDRY
Bloom Energy: Based in San Jose, CA, Bloom Energy supplies renewable electricity to the residential, commercial and industrial sectors. In February 2023, Bloom Energy launched its Combined Heat and Power (CHP) solution. Notably, the CHP-compatible energy platform enhances Bloom’s international expansion plans, especially in Europe.
The Zacks Consensus Estimate for Bloom Energy’s 2023 sales suggests an improvement of 21.9% from 2022’s reported figure. The stock boasts a long-term earnings growth rate of 25%. BloomEnergy currently carries a Zacks Rank #3 (Hold).
Price & Consensus: BE