In its recent 2021 renewable energy market update, the International Energy Agency (IEA) said that renewables were the only energy source for which demand increased in 2020 despite the pandemic. The agency said the global growth in solar capacity "will continue to break records" with annual additions of solar generation 50% higher than pre-pandemic levels by next year.
The Biden administration is seeking to help fund renewable energy through a proposed infrastructure bill. Several areas of Biden's plan focuses on shifting the country to the use of greener energy over the next eight years. As investor sentiment recently shifted from higher-risk to value and cyclical companies, the stocks of companies benefiting from growth in renewable energy have retreated, making now a good time to invest in the expanding sector.
Sustainability is here to stay
Companies in a wide range of industries are adding sustainability to their corporate ethos. More and more are acting on this mission by signing power purchase agreements (PPAs) to power their facilities and ensure products can be made and sold sustainably. Generators of electricity using renewable energy are benefiting and growing from this movement.
Companies including Brookfield Renewable Partners (BEP -0.86%), Atlantica Sustainable Infrastructure (AY 0.81%), and NextEra Energy Partners (NEP -0.42%) have growing opportunities to expand with investments in wind, solar, and other renewable power generation. Brookfield's assets have 85% cash flow contracted through PPAs for an average length of 14 years. It also aims to have between 5% and 9% annual growth in cash available for distribution (CAFD).
NextEra Energy Partners recently announced a more than $700 million acquisition of wind assets which it expects to close in the third quarter of 2021. That will provide 13 years of known CAFD through its contracted agreements. The company expects its distributions to shareholders to grow 12% to 15% annually through 2024. NextEra Energy Partners has added visibility through assets of its sister company NextEra Energy Resources, which it can target for growth.
Atlantica is the smallest of the three, but 100% of its assets are contracted or regulated. It plans to retain some cash for growth opportunities, but aims to pay shareholders 80% of generated cash. Atlantica still predicts annual CAFD growth of 5% to 8% through 2024. These renewable holdings each combine opportunities for growth along with solid dividends yielding between 3% and 4.65% at recent share prices.
Supplying the assets
For investors who want to get closer to the providers of the equipment itself, there are higher-risk companies that potentially offer higher rewards. Enphase Energy (ENPH -3.88%) and SunPower (SPWR -4.61%) supply residential and commercial solar solutions, while TPI Composites (TPIC -4.25%) is a provider of wind turbine blades.
Enphase shares are down more than 20% so far in 2021, but that doesn't make the stock cheap. The three-year return is an eye-popping 2,300%, and it still has a price-to-earnings ratio of about 70 based on 2021 expectations. That's because over the last three years, Enphase has almost tripled trailing-12-month (TTM) sales, while also raising gross profit margin to over 44%, an improvement of about 20 percentage points. The company is benefiting from the rapid growth in residential and commercial solar panel adoption. In its recently reported first-quarter 2021 financial report, Enphase said it shipped almost 2.5 million microinverters -- the components that convert power at the solar panel to what is needed in the home or business. That compares to the 2 million it shipped in the prior-year period, when growth had plateaued before the pandemic impacted sales.
Residential, commercial, and solar storage solutions provider SunPower is also in a position to benefit from the momentum in the trend toward growing solar adoption. While total revenue only grew 5.5% year over year in the recently reported 2021 first quarter, its commercial and industrial solutions segment grew revenue by more than 20%, and generation capacity by 34%. For the full year 2021, the company sees revenue growing about 35%, and estimates 2022 adjusted EBITDA growth of more than 40%. SunPower shares are down about 11% year to date, but more than 50% below February highs.
TPI Composites stock is similarly down about 15% for the year, but more than 40% off recent highs. The company posted record annual revenue in 2020 of $1.7 billion. That represents three-year growth of almost 75%. Last year, the company said it sold approximately one-third of all global onshore and offshore wind blades measured by megawatts generated, excluding China. Growth should continue with help domestically. The Biden administration has a goal of creating 30 gigawatts (GW) of U.S. offshore wind capacity by 2030.
In its first-quarter 2021 report released about a month ago, the company reaffirmed guidance for the year, despite growing commodity and input costs. After sales grew 13.5% in the first quarter, it still sees sales growing about 6% at the midpoint of its full-year 2021 range.
Something for everyone
Investors in these renewable energy stocks can focus on income or growth. Even the asset-owning plays that should provide reliable income also have a growth component to them. Stocks of the higher-growth equipment makers have run higher, but dropped more in the recent rotation away from this sector.
Now is a good time for investors to begin to participate in the sector. It seems inevitable that the global trend toward increasing renewable power generation will continue. There is something for every investor at various risk levels, but all have come down in price recently.