Understanding the recent move in HA Sustainable Infrastructure Capital stock

HA Sustainable Infrastructure Capital (HASI) has drawn fresh interest after changing its name from Hannon Armstrong Sustainable Infrastructure Capital in June 2024. This has prompted investors to reassess what drives the stock and its fundamentals.

HASI’s share price has pulled back 0.8% over the past day and 6.2% over the past week, following a 27.7% year to date share price return and a 57.4% 1 year total shareholder return. Together, these figures indicate momentum that has been building rather than fading.

If you are looking for more ideas in energy and infrastructure linked themes, it could be worth scanning 37 power grid technology and infrastructure stocks

Given HASI’s strong recent total returns, ongoing revenue and net income growth, and an indicated discount to some valuation estimates, you need to ask: Is this stock still undervalued, or is the market already pricing in future growth?

Preferred P/E of 96.3x: Is it justified?

HASI last closed at $40.64, and on a P/E of 96.3x, the stock trades well above several reference points, even though it is flagged as trading 27.1% below one fair value estimate based on future cash flows.

The P/E ratio compares the share price to earnings per share. A higher multiple usually reflects higher expectations for future profit growth. For HASI, that backdrop includes forecast earnings growth of 29.4% per year, which is faster than the expected 16.8% per year for the wider US market. Revenue growth is forecast at 6.3% per year, which is slower than the 11.6% per year expected for the US market.

Several checks suggest the current earnings base is not especially high returning. Return on equity is 2.2%, which is described as low. Forecast return on equity is also expected to remain relatively low at 17.9% in three years. The dividend yield of 4.18% is not well covered by earnings or free cash flow. Profit margins of 61.4% are lower than last year, and debt is not well covered by operating cash flow, while funding is entirely from external borrowing, which is considered higher risk than customer deposits. These factors can make a very high P/E harder to justify if earnings do not progress as forecast.

Relative to peers, the gap is clear. HASI’s P/E of 96.3x is far above the US Diversified Financial industry average of 18.5x, and also above an estimated fair P/E of 18.9x that the SWS fair ratio suggests the market could migrate toward over time. It also sits well above a peer group average P/E of 8.9x, which underlines how much more investors are currently paying for each dollar of HASI’s earnings compared with similar companies.

Result: Price-to-Earnings of 96.3x (OVERVALUED)

However, investors still face the risk that HASI’s high P/E, modest 2.2% return on equity and reliance on external borrowing could quickly sour sentiment if growth expectations shift.

Another view: DCF points in a different direction

While a 96.3x P/E suggests HA Sustainable Infrastructure Capital trades at a rich earnings multiple, the SWS DCF model paints a different picture. With the stock at $40.64 and a DCF value of $55.72, it screens as undervalued on future cash flows. Which signal should be treated as more important?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out HA Sustainable Infrastructure Capital for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 46 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Seeing mixed signals so far? With both risks and rewards in play, it makes sense to review the underlying data soon and weigh both sides yourself using 2 key rewards and 4 important warning signs.

Looking for more investment ideas?

Do not stop at a single stock. If you want a broader watchlist that fits your style, put a few focused screens to work for you today.

• Target potential mispricings by scanning 46 high quality undervalued stocks that combine quality fundamentals with discounted expectations.
• Strengthen your income focus by checking out 14 dividend fortresses that aim to pair higher yields with resilient cash flows.
• Dial down portfolio risk by filtering for 68 resilient stocks with low risk scores that score well on financial resilience and volatility.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.