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.

>>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.

If you liked this article you might like

Hurricane Irma Slows to Category 4, But NHC Warns Storm 'Extremely Dangerous'

Hurricane Irma Holds Category 5 Windspeeds as Florida Braces for Deadly Impact

NovoCure, NextEra, O'Reilly: 'Mad Money' Lightning Round (7/7/17)