The transformation of the U.S. electric grid is underway, prompting Goldman Sachs to see several clear themes that represent investment opportunities in the utility sector through clean technology, nuclear power, additions of liquefied natural gas projects and the construction of transmissions.
These “decarbonization enablers” are should stimulate strong capital investment in the utilities sector (XLU), according to Goldman’s team of analysts led by Carly Davenport, which estimates that 2023-2027 capital spending across its coverage will exceed capital spent in the previous five-year period by approximately $93 billion, or 27%, which largely drives rate base growth and contributes to a five-year CAGR of 6% across its entire coverage compared to the 10-year average of 4%.
The company forecasts a five-year EPS growth CAGR of 9% at NextEra (BORN), and likes the company’s “robust growth profile in renewables, constructive regulatory and enforcement outlook at FPL and attractive relative valuation” after the stock recently lagged.
To Southern Co. (SO), Goldman likes “line of sight on Vogtle’s Unit 3 and 4 nuclear project, attractive exposure to regulated utilities and upside potential around energy transition investments.”
Goldman expects attractive rate base and earnings growth at American Electric Power (AEP), with approximately 60% of the company’s five-year capital plan allocated to transmission and regulated renewables.”
Xcel Energy (XEL) offers attractive leverage for the shift from coal to renewables and construction of the transmission grid, as well as opportunities to improve return on equity through rate filing activity.
Meanwhile, Sempra (ERS) is an attractive growth opportunity for LNG that will fund investment in regulated utilities and enjoys its leverage in a growing Texas market through its stake in utility Oncor.
Goldman gave neutral ratings to Duke Energy (duke), Dominion Energy (D) and Public Service Enterprise Group (ANKLE), while Consolidated Edison (OF) and Exelon (EXC) are rated Sell due to valuations and lower exposure to renewables.
Learn more about Goldman’s buy-listed utilities: