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The transformation of the U.S. power grid is underway, prompting Goldman Sachs to see several clear themes that represent investment opportunities in the utilities sector through clean technology, nuclear power, liquefied natural gas project additions, and transmission buildout.
These “decarbonization enablers” are set to drive strong capital investment in the utilities sector (XLU), according to the Goldman analyst team led by Carly Davenport, which estimates 2023-27 capex across its coverage will exceed the capital spent during the prior five-year period by ~$93B, or 27%, largely driving rate base growth and contributing to a 6% five-year EPS compound annual growth rate average across its coverage vs. the 10-year average of 4%.
Goldman thus initiated Buy ratings on NextEra Energy (NYSE:NEE), Southern Co. (NYSE:SO), American Electric Power (NASDAQ:AEP), Xcel Energy (XEL) and Sempra Energy (SRE).
The firm forecasts a 9% five-year EPS growth CAGR at NextEra (NEE), and likes the company’s “robust renewables growth profile, a constructive regulatory and execution outlook at FPL, and attractive relative valuation” after the stock has lagged recently.
At Southern Co. (SO), Goldman likes the “line of sight to the in-service of the Vogtle Units 3 and 4 nuclear project, attractive regulated utility exposure, and potential upside around energy transition investments.”
Goldman expects attractive rate base and earnings growth at American Electric Power (AEP), with ~60% of the company’s five-year capital plan allocated towards transmission and regulated renewables.”
Xcel Energy (XEL) offers attractive leverage to the shift from coal to renewables and the transmission buildout, as well as opportunities to improve earned return on equity via rate case activity.
Meanwhile, Sempra (SRE) is an attractive LNG growth opportunity that will fund regulated utility investment, and likes its leverage to a growing Texas market through its ownership in the Oncor utility.
Goldman assigned Neutral ratings to Duke Energy (DUK), Dominion Energy (D) and Public Service Enterprise Group (PEG), while Consolidated Edison (ED) and Exelon (EXC) are rated Sell due to valuations and less exposure to renewables.
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