Stock Analysis & Ideas

CEG vs. NEE: Which Inflation Reduction Act Beneficiary is Better?

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When the Inflation Reduction Act was signed into law, it sent the shares of many green energy companies higher. However, near-term upside looks more likely for some than for others.

When the Inflation Reduction Act (IRA) became law in 2022, it sent renewable-energy stocks higher. However, no names in the space are on the same footing. Therefore, in this piece, we compared two green-energy stocks — CEG and NEE — to see which is better. Upon closer analysis, it seems like CEG could be the better bet.

Constellation Energy (NASDAQ:CEG) and NextEra Energy (NYSE:NEE) are independent power producers, meaning they operate privately-owned power plants separate from the regular utility grid. They sell the power they generate to utilities and end users. Let’s analyze.

Constellation Energy (NASDAQ:CEG)

After a tremendous run-up in its stock price over the last year, Constellation Energy’s price/sales (P/S) multiple is roughly in line with the industry average. The company reported a surprise loss in its last quarter, but the catalysts are too good to ignore, making a bullish view seem appropriate.

Constellation was spun off from Exelon (NASDAQ:EXC) in 2022. As the top producer of carbon-free energy in the U.S., it generates about 10% of the nation’s carbon-free electricity. It has about 2 million customers, including 75% of Fortune 100 companies.

Green-energy hedge fund Electron Capital summed up the bull thesis for Constellation perfectly. The stock remains a core holding, even after skyrocketing in 2022.

Electron Capital said the spin-off from Exelon provided a vehicle for investors to get direct exposure to the largest nuclear company and largest generator of carbon-free power. The fund also highlighted the Inflation Reduction Act as another key catalyst.

The bill provides a new tax credit for nuclear power production, which basically sets an inflation-indexed profit floor for Constellation’s reactors. While CEG currently expects about $2.55 billion in EBITDA for 2022, Electron sees a path for it to reach at least $3.7 billion in the future due to the IRA and potentially up to $5 billion if commodity prices remain high. While Constellation is currently unprofitable as it transitions away from its spin-off, its full-year earnings could triple by 2026, reports note, due in part to the IRA.

What is the Price Target for CEG Stock? 

Constellation Energy has a Moderate Buy consensus rating based on seven Buys, three Holds, and zero Sells assigned over the last three months. At $99.30, the average price target for Constellation Energy stock implies upside potential of 20.51%.

NextEra Energy (NYSE:NEE)

NextEra Energy is the largest electric utility holding company, the third-largest U.S. energy company, and the largest renewable energy generator in the U.S. From a P/S multiple standpoint, the company looks grossly overvalued at 8.4 times. Due to its high P/S multiple and its exposure to natural gas prices as one of the largest generators of energy via natural gas, a neutral view looks appropriate for NextEra, at least for now.

Independent power producers are trading at an average P/S multiple of 1.1 times, compared to their three-year average of 1.2. Meanwhile, the average P/E ratio in the renewable-energy industry is 1,075 times, compared to the three-year average of 417.4 times. Therefore, that metric makes renewable energy companies significantly overvalued currently due to the IRA, although the industry is trading at around its three-year average P/S ratio of 1.8 times.

Unfortunately, NextEra missed revenue expectations in its latest earnings report, coming in at $6.16 billion versus the consensus estimate of $6.55 billion. The company’s shares tumbled 6% after the earnings release and announcement of a key executive’s departure.

While NextEra isn’t a pure clean-energy play, it will likely be one of the IRA’s biggest beneficiaries due to its further expansion into renewables. The company is exposed to natural gas prices, which were quite high for most of last year, although they crashed more recently. As NextEra expands further into green energy, additional upside potential seems likely in its stock, but for now, I’m sticking with a neutral view.

A bonus that could make NextEra worth holding with expectations of eventual upside is that it offers an attractive 2.25% dividend yield and has raised it annually for the last nine years. While Electron Capital also likes NextEra, hedge funds collectively unloaded more than 7 million shares in the last quarter.

What is the Price Target for NEE Stock? 

NextEra Energy has a Strong Buy consensus rating based on eight Buys, zero Holds, and zero Sells assigned over the last three months. At $95.50, the average price target for NextEra Energy stock implies upside potential of 27.25%.

Conclusion: Bullish on CEG, Neutral on NEE

In some critical areas, Constellation Energy and NextEra Energy are quite similar, most notably in benefits from the IRA. However, NextEra is not purely a renewable energy company, and it has a ways to go before generating as much renewable energy as Constellation already does.

Finally, NextEra is overvalued on a P/S basis, and it’s investing heavily to build its renewable power generation capacity. Thus, Constellation looks better than NextEra, although both appear to have a bright future in the long term.


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