Should You Pick Ameren Over NextEra?

The stock price for NextEra Energy (NYSE: NEE), the largest electric utility holding company in terms of market cap, is up by over 105% since the beginning of 2017, driven by the company’s fast-growing renewable energy business. In comparison, Ameren (NYSE: AEE), a regulated utility that operates in Illinois and Missouri, has seen its stock grow by about 40% over the same time frame. In other words, NextEra stock grew at 2.5x the rate of Ameren. While Ameren’s revenue growth has been a mixed bag compared to NextEra, the company’s margins have been trending steadily higher, while the regulatory environment in its key geographies has been improving. Does this make Ameren a better bet compared to NextEra? We think it does, and outline more details and the underlying numbers in our dashboard Is NextEra’s 2.5x Price Rise Vs. Ameren Justified?

NextEra’s Fundamentals Are Stronger, But Ameren’s Valuation And Outlook Is Attractive

Let’s look at the core business prospects of the two utilities a little more closely. NextEra operates the largest electric utility in the state of Florida and also has a non-regulated arm called NextEra Energy Resources which is one of the world’s largest producers of wind and solar energy. The company’s valuation has soared over the last few years, as investors sought the strong growth in its renewables business and its exposure to Florida’s electric utility market. Florida currently offers a favorable regulatory environment for utilities, and growth prospects are also good, considering the higher population growth and population density of the state.

Ameren runs regulated electric and gas utilities in Missouri and Illinois, serving about 2.5 million electric and around 1 million natural gas customers. While the company’s revenues growth has been mixed (just about 3% growth between 2016 and 2018), with revenues actually declining slightly in 2019, due to milder summer temperatures, the outlook looks relatively bright. The regulatory environment in Missouri and Illinois is improving which should help to reduce regulatory lag for rate increases and potentially allow for better returns on investments. The company has also been steadily improving margins, with net income margins growing from 11% in 2016 to 14% in 2019.

Overall, we think Ameren’s business looks reasonably attractive compared to NextEra at current prices. Ameren trades at 21x 2019 earnings, compared to 30x for NextEra. Moreover, Ameren’s growth prospects also look set to improve. The company is planning $16 billion in capital spending over the next five years, roughly 20% higher than its previous five-year plan and this could help it boost rates and revenues, aiding its earnings and dividend growth.

Are Dominion and Southern better utility picks compared to Duke Energy? Find out in our dashboard analysis Trefis Utilities Theme: NextEra, Duke, Dominion & Southern which has more details on the fundamental and stock price performance of key U.S. listed utilities.

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