Clearway Energy: Profitable clean energy company priced at a premium

Clearway Energy Review

Clearway Energy (NYSE: CWEN) is an energy company that focuses on the generation and distribution of renewable energy. So far, the company has installed approximately 6,200 MW of wind and solar generators and batteries energy storage. The company has a total of 8,700 MW of energy assets, which include natural gas production facilities with a total capacity of approximately 2,500 MW, which can also be considered part of clean energy. One of the things that makes this company unique and stand out is that it is already profitable and paying a dividend. This is important to keep in mind because many clean energy companies have yet to turn a profit, making them a questionable investment choice for more conservative (i.e. financially conservative) investors.

Clearway’s portfolio includes some big ones partners such as PG&E Corporation (PCG), Verizon (VZ) and Edison of Southern California. In most of these projects, the company holds 100% of the shares, while in a few projects it holds 50% of the shares. The company’s customer base spans a large geographic area, but many also appear to be located on the West Coast of the United States, where there is strong interest in clean energy, not to mention plenty of sunlight for solar power generation.

Cash flow

As I said above, one thing that sets this company apart from many other clean energy companies is that the company has been profitable and generating positive cash flow for some time. Over the last 12 months, the company generated $708 million in cash flow from its operations and reported an operating profit of $209 million. Compare this to the company’s total market capitalization of $5.2 billion and its price to operating cash flow ratio looks quite cheap at a multiple of 7, but we’ll get to valuations later. The reason for the large difference between a company’s operating cash flow and operating income is the way it accounts for asset depreciation for tax purposes, and from a profitability standpoint I wouldn’t worry too much about it. The company will apply the maximum possible amount of depreciation on its assets to minimize taxes, which is normal behavior for companies with large assets.

When it comes to renewable energy sources like wind and electricity, location and efficiency become extremely important. If you build solar panels in a place that is known to be cloudy most of the year (e.g. Washington state), you won’t have much fun. Likewise, if you put wind turbines where there isn’t much wind, you won’t be able to produce much electricity, even if you have the best technology. Harvesting renewable energy is like harvesting food on a farm, and there are many variables to pay attention to, such as location, weather conditions, as well as the overall performance of the tools and technology used. When we look at Clearway Energy’s performance statistics, we see that it is performing quite well in most locations. For example, year-to-date, the company has seen efficiencies of 123% in California, 100% in Texas and 100% in the Eastern region for its wind portfolio. Across the solar portfolio, efficiency ranged from 85% to 94% month-to-month, depending on the amount of sunlight received in these regions, with a year-to-date average of 90%. Please note that these are mainly winter months and these numbers should increase to 100% during the summer months, which can last until October in the sunnier southern states. In terms of availability, Clearway’s metrics ranged from 89% to 99%, indicating that it is doing a good job of sourcing almost all of its available energy from these locations, particularly within its solar portfolio.

Margins

When talking about performance, company profitability metrics give us a mixed picture, depending on which metric we take into account. Again, these fluctuations are due to the way a company uses asset depreciation to reduce its tax bill. For example, over the last 12 months, the company used more than $600 million in depreciation. CWEN’s gross margin of 62% is well above the sector median of 45%, but slightly below the company’s own 5-year average of 66%, which may have been impacted by energy price fluctuations. The company’s EBIT margin is 16%, which is below the sector median of 21%, while the company’s EBITDA margin is 73%, which is well above the industry median of 36%. The reason is that EBITDA does not take into account the letter “D”, which stands for depreciation, which is a huge part of this company’s expenses. It’s probably for this reason that it’s best to look at a company’s cash flow ratios, rather than net income, to get a good measure of its financial health. However, this does not mean that we should completely ignore net income and depreciation, because at some point these depreciating assets will need to be replaced, and this will cost money. Companies cannot depreciate assets forever without eventually replacing them, otherwise it would be as if there was a loophole that generated free tax breaks forever.

Dividend

Clearway Energy has a solid dividend yield of 6.1%, and its short history of dividend growth shows a decent upward trend. It should be noted that the company has not increased its dividend every year, and there have even been years where the dividend has stopped, but the overall trend is upwards. Year over year, CWEN recorded a dividend growth rate of 7.7%, and the three-year average dividend growth rate is 10%. The long-term average annual dividend growth is closer to 6.5%, which is better than the 3-4% dividend growth expected by the overall market. Currently, the company pays a dividend of $1.64 per share annually while generating net income of approximately $1.00, which seems unsustainable, but the company generates cash flow from its operating activities of approximately $3 per share, which makes the dividend payout more sustainable.

CWEN share valuation

However, Clearway Energy’s stock valuation doesn’t look entirely cheap. CWEN’s GAAP P/E is 37 for the trailing 12 months and 25 for forward earnings, both of which are significantly higher than the sector median in the 16-17 range. Even the company’s price-to-EBITDA valuation, which excludes depreciation and amortization, seems a bit high at 15 for trailing multiples and 12 for forward multiples compared to the sector average of 10-12. The company looks cheaper than its peers with a price-to-book ratio of 1.40 versus 1.67 and a price-to-cash-flow ratio of 4x versus 7x, but that may be more of an outlier than rules. I wouldn’t call this company very expensive given its cash flow, growth rate, and dividends, but I wouldn’t call it very cheap either.

Application

We live in the face of increasing energy demand and there will likely be greater demand for renewable energy in the future due to the increase in the number of electric vehicles, greater energy consumption in AI and cloud-driven data centers, greater use of robotics and automation, and population growth. These factors will drive higher energy consumption over the next decade or two, while global climate change will drive the use of more renewable energy. This company appears to be in an advantageous position to capitalize on these trends if it plays its cards right. One of the biggest challenges for clean energy companies is that most of them are not profitable because the industry is fragmented and very few companies have enough scale to achieve profitability. This company appears to be one of the few clean energy companies that is profitable and even pays a dividend.

This could be a good play for investors looking for a profitable break in the clean energy sector, but it’s also important to remember that the current valuation isn’t cheap.