One sector that has absolutely been crushed this year is the once red-hot yieldcos. While some are not in the best financial shape, others are the proverbial babies being tossed out with the bath water, and they may be offering investors incredible entry points now. Plus, the sell-off in the top companies also has increased the payouts as the prices have declined.
In a new research report, Merrill Lynch expects the recent rally in yieldco valuations to continue and recommends that investors start positioning toward the lower risk growth stories with limited risk to run-rate cash flows. The firm sees magnitude, quality and strong growth as the characteristics to look for. Here are the four top yieldcos that are rated Buy at Merrill Lynch.
NextEra Energy Partners
This very solid company has been absolutely hammered. NextEra Energy Partners L.P. (NYSE: NEP) is a growth-oriented limited partnership formed by NextEra Energy, a leading clean energy company, to own, operate and acquire contracted clean energy projects with stable, long-term cash flows. Headquartered in Juno Beach, Fla., NextEra Energy Partners owns interests in wind and solar projects in North America. These renewable energy projects are fully contracted, use industry-leading technology and are located in regions that are favorable for generating energy from the wind and sun.
While the company posted mixed third-quarter results, growth was evident, but a narrowing of operating margins contributed to decline in earnings. Operating cash flow though looks promising, and for patient investors this company may be yet another gem.
Investors are paid a very reasonable 4.255% distribution. The Merrill Lynch price target for the stock is $33, while the Thomson/First Call consensus target is higher at $36.50. The shares closed trading on Thursday at $25.69.
This stock is down 50% since early June. NRG Yield Inc. (NYSE: NYLD) owns a diversified portfolio of contracted renewable and conventional generation and thermal infrastructure assets in the United States, including fossil fuel, solar and wind power generation facilities that provide the capacity to support more than a million American homes and businesses. The company’s thermal infrastructure assets provide steam, hot water and/or chilled water, and in some instances electricity, to commercial businesses, universities, hospitals and governmental units in multiple locations. Some Wall Street analysts see distributions increasing by 15% to 18% over the next two years.
The company posted disappointing second-quarter numbers and the market took no quarter as the stock has been absolutely eviscerated. While operating revenue increased from $173 million a year ago to $217 million, cash available for distribution fell from $43 million to $26 million, and that clearly spooked investors. The company is expected to report third-quarter numbers next week.
NRG Yield investors receive a very large 5.95% distribution. The Merrill Lynch price target is $20, and the consensus price target is $22.23. Shares closed Thursday at $14.17.
This stock is down almost 25% since mid-June. Pattern Energy Group Inc. (NASDAQ: PEGI) is an independent power company with a portfolio of 12 wind power projects, with a total owned interest of 1,636 megawatts, in the United States, Canada and Chile, that use proven, best-in-class technology. Pattern Energy’s wind power projects generate stable long-term cash flows in attractive markets and provide a solid foundation for the continued growth of the business. Analysts around Wall Street see the distribution rising to over 7% by 2018 and distributions rising 12% to 15% over the next two years.
The company has seen some solid earnings estimate revisions over the past month, suggesting analysts are becoming a bit more bullish on the firm’s prospects in both the short and long term. Pattern Energy is expected to report third quarter numbers next week.
Investors are currently paid a sizable 6.25% distribution. The Merrill Lynch price target is $29, and the consensus price objective is $29.13. The stock closed on Thursday at $23.27.
This may be just the right stock for investors that like the sector but want more conservative route. TerraForm Power Inc. (NASDAQ: TERP) owns and operates solar and wind generation assets serving utility, commercial and residential customers. Its portfolio consists of solar projects located in the United States, Canada, the United Kingdom and Chile, with total nameplate capacity of 887.1 megawatts. It was formerly known as SunEdison Yieldco and changed its name last year, and it is perhaps one of the highest profile companies operating as a yieldco. Some Wall Street analysts see distributions rising to 5.65% by 2017.
Wall Street experts feel that the combination of dividends and a growth-oriented company in the renewable energy field makes good sense for the short term. The company’s relationship with the sponsor SunEdison is a positive because of its large development pipeline and incentive to grow TerraForm’s portfolio, which is composed of projects with long-term contracts in place, solid counterparties with high investment grade credit ratings, very diversified assets (including solar and wind projects) and low asset ages.
TerraForm investors are paid a 7.4% distribution. The Merrill Lynch price target is $29, but the consensus is higher at $32.33. Shares closed most recently at $18.62.
The Merrill Lynch idea is solid: Buy the beaten-down shares now when the market is just warming back up to the sector. Any tailwind to get things going will not only renew interest, but probably will chase away the legions of short-sellers that have targeted these companies.