Shares of clean energy stock NextEra Energy Partners (NEP) have pulled back by more than 4% since Wednesday, after the company’s most recent quarterly results. 

The Florida-based renewable energy company registered strong earnings growth in earnings during Q2 after the adjusted net income topped $1.13 billion up from $989 million in the same quarter for the previous year. This equates to EPS of $2.35 up from $2.08 in the previous period.

The company’s headquarters continues to be the main income generator. In the second quarter of 2019, NextEra Energy’s Florida Power & Light (FPL) unit posted a net income of $669 million or $1.37 in EPS after adding more than 100,000 new customers from the previous second quarter. Last year, the company acquired Gulf Power, which added $58 million in net income or $0.12 per share in the recently concluded quarter.

On the other hand, NextEra Energy’s resources segment saw a net income of $448 million or $0.93 per share of the adjusted earnings, which represents a 12% year-over-year growth. 

The growing appetite for clean energy

The company’s management noted that NextEra Energy witnessed an overall growth of about 13% in adjusted earnings on a year-over-year basis and expects continued growth of mid-high single-digit annually through 2021. The company continues to capitalize on the growth of the clean energy market in the US as more people embrace measures to curb climate change. 

The corporate sector is also becoming more involved. Some companies now are nearly 100% reliant on clean energy for their operations. According to reports on how the corporate sector is investing in clean energy, at least 20 of the Fortune 500 companies have committed to powering all their operations with renewable energy. This could play a crucial role in expanding the addressable market for clean power. But is there a twist to the story?

Potential bottlenecks

While energy from fossil fuels like coal continue to witness a rapid decline in the market share, this decline is not all attributed to the increasing use of renewable energy. In fact, renewable energy could face a potential slowdown in growth rate in the coming years if what industry experts are suggesting turns out to be true.

According to reports, the main force behind the declining usage of coal power and the subsequent closure of several coal plants in the US is natural gas. Natural gas is cleaner and less harmful to the environment when compared to dirty coal. Furthermore, due to the current fall in natural gas prices, it has become more competitive to renewable energy sources from a pricing perspective, and it is still more reliable.

Solar and wind power rely on sunlight and strong winds, which makes them relatively unreliable. Because of this, natural gas is now tipped to be a real force in the power industry in the coming years.

As such, companies operating in this sector, including NextEra Energy could face a significant slowdown in growth rate, unless they widen their clean energy net to include and significantly capture natural gas.

Nonetheless, the industry will still experience considerable growth. And this, coupled with NextEra Energy’s recent pullback in stock price, should be enough to capture the attention of investors.

Conclusion

From a valuation viewpoint, shares of NextEra Energy are currently trading at an unfavorable P/E ratio of about 62.41 times. But its P/B ratio of 1.56 times is relatively in line with industry averages while its P/FCF (price to free cash flows) is more accretive at 8.96 times. The company enjoys a strong operating margin of 52.70%, which gives it the flexibility to adjust to adverse circumstances in the coming quarters.