This Earth Day Week: You Can Have Your Conscience & Count Your Profits, Too!
BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In honor of Earth Day, which was Monday, this article is for those who would rather not invest in the Big Oils such as ExxonMobil, Chevron, and BP Plc. Though I'm using the oil companies here, the point is universal: You don't have to choose between investing in industries or companies with which you have ethical issues or settling for lesser returns than those with no such qualms.
While there are many companies that could be included in an 'Earth Day portfolio,' I've chosen these three: NextEra Energy (NYSE: NEE), the largest alternative energy provider in the U.S.; American States Water (NYSE: AWR), primarily a California water utility; and Valmont Industries (NYSE: VMI), a manufacturer of agricultural irrigation systems, among other products.
First a look at their performances vs. the Big Oils, and then a closer look at each.
Water & cleaner energy have been trumping oil
Valmont's much smaller size 10 years ago vs. the oil companies undoubtedly helped in its out-performance; nonetheless, it speaks to the article's point. Chevron is the only Big Oil with outstanding 10-year performance. Even a so-called stodgy water utility, American States Water, performed just about as well as ExxonMobil. And that's with less stock price volatility (American States' beta is 0.49 vs. Exxon's 0.89).
Big Oil has been a been a Big Loser over the 1-year period. American States was the top performer with a 61% return, followed by NextEra with a 31% return. Chevron and Valmont, at 17% and 16%, edged out the market's 15% return. Exxon and BP returned 5% and 2%, respectively.
American States Water
American States is the parent company of Golden State Water and American States Utility Services. Golden State provides water to about 75 communities throughout Northern, Coastal and Southern California. American States Utility Services operates and maintains water and wastewater systems on military bases throughout the U.S. The company also provides electricity to customers in the Big Bear recreational area of California.
The long-term U.S. warming trend favors water utilities and other water supply related stocks. This holds especially true in regions where fresh water supplies are becoming more scarce.
Stats & financials:
These are great growth rates for a utility. The forward P/E and 5-year PEG suggest the stock is pricey. But that's generally the case with "safer" utilities, especially ones that are both growth and income plays.
The company's 2012 results were very strong. Revenue increased 11.2%, while EPS from continuing operations rose 26.5%. The services subsidiary had particularly strong results. Its earnings grew 105% in 2012 to generate nearly 28% of the company's total earnings, up from 17% in 2011.
NextEra (formerly FPL Group) generates, transmits, and distributes electricity in the U.S. and Canada. It's the largest generator of renewable energy (solar and wind) in the U.S. It also generates electricity through conventional means (gas, nuclear, oil, and coal). Its main electric service territory is the east and west coasts of Florida.
The increasing population in the company's Florida service territory should continue to act as a growth tailwind. It's less certain whether the company's wholesale energy business will benefit as renewable energy becomes an increasingly important source of generating power. That depends on power prices, which investors should monitor.
Investing in a stable utility company that’s profitably developing and using renewable energy to generate electricity is a less risky way to invest in renewable energy than investing in a pure play solar or wind company.
Stats & financials:
The 3-year revenue growth is a bit worse than the industry average of -0.8%. However, EPS growth is twice the industry average.
The company's earnings jumped in 2010, but have decreased slightly in both 2011 and 2012; EPS went from $4.74 in 2010 to $4.59 in 2011 to $4.56 in 2010. One reason was the small revenue contraction. However, increased capital expenditures over the past two years have been the main reason. The company just completed upgrading a nuclear facility, so capital expenditures should decrease, or at least not continue to increase. That is, if spending on alternative energy projects doesn't increase.
Analysts expect EPS to increase to $4.93 this year from $4.56 in 2012.
Valmont is the world leader in mechanized irrigation equipment for agriculture. It's one of about five companies that manufactures center pivot & lateral move systems, and only one of two companies which is publicly traded (Lindsay Corp. is the other). These systems provide considerable advantages over older irrigation methods as they conserve water, energy, and labor while increasing crop production.
Valmont also has three other segments: Utility Support Structures, Infrastructure, and Coatings.
Valmont had a record year in 2012 due to favorable agricultural economics topped off by last summer's widespread drought. While commodity prices may not be as high this year and drought conditions not as bad, indications are that demand for irrigation systems should remain strong in 2013.
Long-term growth drivers for the irrigation business: (1) the global warming trend; and (2) ballooning global population.
The upgrading of the North American electrical transmission grid is a growth driver for the utility support business.
Stats & financials:
The 5-year PEG suggest the stock is reasonably priced. ROE is solid, and profit margins have expanded recently. Cash flow has been moving in the right direction, too.
Investors who have ethical issues regarding certain industries or companies can have their conscience and profit, too.
The three companies discussed have performed well in the past -- which usually speaks to management's ability to execute -- and look appealing going forward, especially Valmont and American States Water.
Long-term warming trends and a finite fresh water supply favor water supply related stocks, such as American States Water. Those same trends plus a ballooning global population should be tailwinds for an agricultural irrigation systems manufacturer, such as Valmont. The increasing population in NextEra's main service territory (Florida) should benefit it.
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