Atlantica Sustainable Infrastructure Stock Not Yet A Buy (NASDAQ:AY)

Atlantica Sustainable Infrastructure (NASDAQ:AY) doesn’t perhaps sound like the most exciting company, but they operate in a growing industry. They own, manage and also invests into renewable energy sources. But they also have vested interests in natural gas and water assets in the United States.

But with revenues staying still in the last years, it makes it difficult to make the company out the be a strong buy right now. Instead investors might want to just hold on to their stocks and collect the nearly 7% dividend yield and wait for a better buying opportunity.

Steady Revenues And Cash Flows Can’t Save It

With revenues staying steady all throughout the last 5 years, almost plateauing I have a hard time seeing any form of growth in the future. If they haven’t been able to do it in the last 5 when money was cheap to borrow, what’s to say they can improve in the future.

Right now I expect Atlantica Sustainable Infrastructure to focus on generating free cash flow and try to keep their operating expenses down, all in the name of keeping up their rather high dividend.

Whenever I see a company not growing revenues and instead focusing on free cash flow and paying that to shareholders it means it’s a bad long-term investment. The company feels like they have maxed out their revenues and rather than expanding and building new revenue streams want to satisfy. Normally I like when a company focuses on the shareholders’ value and prioritizes them, but there are limits. The likely depreciation in share price will cancel out any dividends I could collect from the company.

Worrying Future

With revenue growth being at such a slow pace it’s hard to see the company willing to focus on their future market share and establishment of it. Atlantica Sustainable Infrastructure is operating in many different sectors and all over the world.

One particular sector that they are working in is renewable energy. But it doesn’t seem the company has been able to fully capitalize on the larger push towards green energy. With around 77% of revenues coming from renewable energy solutions they are selling, it’s worrying to see it not being larger year after year.

Perhaps a reason for this would be the crippling debt that the company holds currently. With $5.2 billion in debt and just under $800 million in cash I think Atlantica Sustainable Infrastructure is focusing more on paying off this then expanding their business. A positive I have found would be that they are currently not taking in more debt, instead they have paid off about 19% since they topped out at $6.1 billion.

The renewable energy market is large and the solar sector for example is expected to grow around 20% CAGR for the next 10 years. Solar installations for residential zones are especially underpenetrated so if Atlantica Sustainable Infrastructure manage to play their cards I could see them seeing revenues pick up once again. But for me to believe that I would want to see them lower or remove their dividend and instead focus on growing the company’s top line and in turn the bottom line.

Valuing Atlantica Sustainable Infrastructure

Getting a value and price target on your potential investment beforehand is incredibly important in my opinion. Valuing AY is quite difficult as they have not managed to keep their bottom line as steady as their top line. With revenues plateauing in the last 5 years, the bottom line has seen some pretty significant swings.

With the current share price of AY being around $26 I notice quickly that it trades at a high premium compared to the revenues and net income it brings in. I have a lower p/e set compared to the sector because I believe that with the revenues being so slow to grow it doesn’t deserve a higher one, and the future growth prospects aren’t all that high either.

I also expect that they will be able to gain back their margins again. With the last few years being so disruptive to the supply chains it’s no wonder operating expenses have been a little bit all over the place. I think that things can stabilize and AY can once again start generating positive EPS. With the management also being more focused on growth I believe that further supports an increased bottom line in the coming years.

The chart only goes to 2027 because I think this is where a lot of investors would be looking right now, especially me. I want to know how they are doing in terms of turning themselves profitable and capitalizing more and more from the green energy push. If they can get a larger foothold in that market I would expect the EPS to start increasing at a quick pace and in turn take the share price further up with it. But until then I expect conservative numbers.

Conclusion

Atlantica Sustainable Infrastructure is not new to the energy markets. It has over the last 10 years increased revenues more than 10x. But with the last 5 years being a disappointment in all honesty in terms of revenue growth, it’s difficult to see a future where AY is a larger player.

With 6.5x more debt than cash at hand, the next years will have to be focused on paying that down to gain a better financial ground to stand on. The cash flows being positive and also growing is a larger plus for me. But they are being spent on dividends instead of invested back into the company. I still think AY could have potential, but they seem to have other ideas, plateauing their revenues and paying a high 6.5% dividends instead.

All in all I wouldn’t invest any money into Atlantica Sustainable Infrastructure right now unless I wanted to capitalize on the dividend. But I fear there is a large risk of share depreciation in the coming years that would destroy any incentive to collect a dividend. As value investors we want something that can offer market-beating returns over the long-term. For investors however who want a “safer” company where they can collect a dividend yield, holding onto any shares in the company, I think would be the best course of action.