Last year was tough for the broader market, and most stocks were down sharply. That includes infrastructure operators Brookfield Infrastructure (BIPC -0.31%) (BIP -0.67%) and Atlantica Sustainable Infrastructure (AY -0.22%). Brookfield’s stock price tumbled 14.5% last year, while Atlantica’s plunged 27.6%.
However, the energy-related infrastructure stocks have started to heat up this year:
Here’s a look at what has fueled their rally and whether it can continue.
Sentiment-driven volatility in the near term
Like most stocks, Brookfield Infrastructure isn’t immune to market volatility. CEO Sam Pollock wrote about its impact in his fourth-quarter letter to investors in the utility, midstream, transportation, and data infrastructure company. Pollock noted:
Despite achieving exceptional results throughout the year, negative market sentiment during the fourth quarter caused a decline in our unit price. Our unit price can fluctuate based on various factors, including sentiment. Typically, we see a rebound when sentiment improves, which is what occurred in January.
As Pollock pointed out, sentiment can significantly impact Brookfield’s stock price in the near term. However, it’s not what drives value over the long term. Pollock wrote, “we strive to create value for investors and believe that over time our unit price will reflect the success we achieve in growing FFO and distributions.”
It has certainly done that over the years. The CEO pointed out that Brookfield has grown its FFO at a 16% compound annual rate since its formation while increasing the dividend at a 10% yearly pace. Those factors have enabled it to generate a more than 15% total annualized return, significantly exceeding that of the S&P 500.
Pollock continues to “believe that our strong results will be captured in our unit price over time.” With more growth ahead, that suggests shares have more upside. Brookfield expects to grow its FFO per share by 12% to 15% this year, powered by strong organic growth drivers (elevated inflation and expansion project completions) and the positive impact of its capital recycling strategy. Those drivers should continue powering healthy FFO growth for the global infrastructure operator in the coming years.
A catalyst emerges
While market sentiment has also weighed down Atlantica Sustainable Infrastructure over the past year, that’s not the only factor. The other big issue is the problems plaguing its largest shareholder, Algonquin Power & Utilities (AQN -1.79%). Those issues have caused uncertainty about Atlantica’s ability to expand its renewable energy, natural gas, electricity transmission, and water infrastructure platforms.
However, shares have started heating up this year because the market sees a potential catalyst on the horizon. Atlantica recently launched a review of its strategic alternatives. Those could include finding a new keystone investor to replace Algonquin or selling the entire company.
Finding a strategic partner to acquire Algonquin’s stake could be mutually beneficial. For one thing, it would enable Algonquin to recycle that capital into its Kentucky Power deal. Meanwhile, it could provide Atlantica with a partner to help drive its growth. A new strategic investor could also supply the company with acquisition opportunities to help grow its cash flow and dividend.
On the other hand, an outright sale could enable all investors, including Algonquin, to receive a premium price for their shares.
Given Algonquin’s current situation, some transaction seems likely. What’s unclear is whether it will lead to a partnership that could grow shareholder value over the long term or an acquisition at a premium price that could provide a near-term boost. While either outcome could send shares higher, a sale caps the long-term total return potential.
The potential to continue heating up
Brookfield Infrastructure and Atlantica Sustainable Infrastructure have started heating up after a chilly performance last year. Both stocks could continue to rally. Brookfield has a lot of growth ahead, which should drive its value over the longer term. Meanwhile, Atlantica has a potential near-term upside catalyst. That makes both stocks potentially compelling investment opportunities right now.
Matthew DiLallo has positions in Atlantica Sustainable Infrastructure Plc, Brookfield Infrastructure, and Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.