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Why NextEra Energy's Momentum Will Continue Into the Third Quarter

Stocks in this article: NEE NEP MS XLU SRE

NEW YORK (TheStreet) -- NextEra Energy's (NEE) spinoff of NextEra Energy Partners (NEP) was a success on its IPO on Friday, rising 28% from the $25 per unit pricing (the top of the $23-$25 projected range). The operator of wind and solar generation assets raised $406.25 million on the 16.25 million-unit offering.

By shedding assets in a hot initial public offering market, NextEra Energy is able to pursue earnings accretive acquisitions such as Energy Future Holdings Corp.'s Oncor unit or other shareholder friendly initiatives like a dividend raise (10% annual increase since 2011).

While Oncor, a profitable electricity business of the bankrupt Energy Future Holdings, would fit perfectly in NextEra's established Texas business, Energy Future Holdings (Dallas-based) rejected the company's $2.3 billion loan offer last week. Despite the rejection NextEra will still seek to attain the Oncor unit along with its creditors at Morgan Stanley (MS). Of the $2.3 billion offer, NextEra would contribute $1 billion to the current restructuring plan.

>>Devon Energy Completes Transformation With Linn Energy Deal

On April 30, NextEra Energy reported first-quarter earnings per share of $1.26 per share compared to the consensus estimate of $1.07 per share. This was the largest EPS beat in over three years. Revenue rose 12% from the first quarter of 2013 to $3.67 billion. Cash and cash equivalents rose $50 million to $488 million from the fourth quarter of 2013 and long-term debts fell $15 million to $23.82 billion from the previous quarter.

The company will report second-quarter earnings during the week of July 28. Over the last six quarters, the stock has closed higher after reporting earnings in the morning.

The electric power company trades at a P/E ratio of 17.79x (2015 estimates) with 6.9% EPS growth and has 4.8% revenue growth. The current dividend yield is 2.85%. Compared to the other nine heavily weighted components in the top ten of the Utilities Select Sector SPDR ETF (XLU), only Sempra Energy (SRE) has a higher EPS growth rate at 8.3% (2015 estimates).

However, based on valuation NextEra Energy is the more attractive investment compared to Sempra Energy's P/E ratio of 21.45x (2015 estimates). A gain of 12% from current levels ($101.60 to $114.00) would still have the stock trading at a forward P/E ratio under 20x. NextEra currently only has an average analyst price target of $104.50.

Call Buyers Expect New Highs This Summer

On June 27, someone rolled out 1,935 July $100 calls into 3,970 July $105 calls. This trade involves selling the July $100 calls for $2.60 and buying the July $105 calls for 57 cents at the same time. Two days prior to this trade someone purchased 5,000 Aug $105 calls for $1.15-$1.25 each. Both of these traders are positioning for a 4%+ move higher over the next 3-7 weeks. Total call open interest is 63,511 contracts vs. the total put open interest of 28,291 contracts.

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