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

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.

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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.

Textbook Breakout on the Weekly Chart

NextEra Energy Options Trade Idea

Buy the Aug $105/$110 call spread for a $1.00 debit or better

(Buy the Aug $105 call and sell the Aug $110 call, all in one trade)

Stop loss- None

1st upside target- $2.00

2nd upside target- $3.00

At the time of publication the author had shares of stock and Aug $105 calls in NextEra Energy.

Follow Mitchell Warren on Twitter.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates NEXTERA ENERGY INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate NEXTERA ENERGY INC (NEE) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income, notable return on equity, solid stock price performance and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • NEE's revenue growth has slightly outpaced the industry average of 10.4%. Since the same quarter one year prior, revenues rose by 12.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Electric Utilities industry. The net income increased by 58.1% when compared to the same quarter one year prior, rising from $272.00 million to $430.00 million.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Electric Utilities industry and the overall market on the basis of return on equity, NEXTERA ENERGY INC has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • The strong earnings growth this company has enjoyed -- up -- has apparently played a role in driving up its share price by a solid 27.00%. In addition, the rise in the general market has likely contributed to this stock's strong performance during this past year.We feel that the stock's sharp appreciation over the last year has driven it to a price level which is now somewhat expensive compared to the rest of its industry. The other strengths this company shows, however, justify the higher price levels.
  • NEXTERA ENERGY INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, NEXTERA ENERGY INC reported lower earnings of $4.03 versus $4.56 in the prior year. This year, the market expects an improvement in earnings ($5.34 versus $4.03).
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