Is TerraForm Power, Inc. a Buy?

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Shares of wind and solar power company TerraForm Power (NASDAQ: TERP) have been scorching hot in recent months, rising more than 9% in the last quarter alone. Because of that, some investors might wonder if TerraForm Power's stock is still a buy. While that recent pop suggests that shares aren't as cheap as they were, it doesn't mean they're not still attractive, especially considering that the stock is down about 2% for the year and sits more than 15% below its 52-week high.

With the price point still low, investors have a chance to generate strong gains in the coming years given the growth the company has on the horizon.

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Quickly making progress

TerraForm Power hit the ground running in 2018. One of the company's focuses has been to execute its turnaround plan, which is already starting to gain steam. A key part of that strategy has been to improve the profitability of its legacy portfolio by driving out costs. Thanks to a strong start to the year, the company is on track to achieve its plan and reduce expenses by $25 million. Hitting that goal would boost TerraForm's cash flow by $0.05 to $0.07 per share, or about 8%, with minimal effort.

On top of that, the company has been seeking ways to expand its portfolio through organic investments and acquisitions. TerraForm made a huge stride in the department by recently completing a needle-moving deal in Western Europe. Not only will that transaction boost cash flow -- with estimates calling for another 8% increase -- but it will provide a platform for future growth.

As a result of these initiatives, the company has most of the power it needs to grow its dividend at a 5% to 8% annual rate for the next five years. When the low end of that growth rate is added to the 6.5%-yielding dividend, it provides TerraForm with the capability to generate double-digit total annual returns for investors in the coming years.

Still much more ahead

However, TerraForm's strong start to 2018 is likely just the beginning of good things to come for the renewable power producer. It's working on several other internal initiatives that could enable it to grow even faster. For starters, it has the right of first offer from previous acquisitions to buy several assets and is already in negotiations on a couple of small transactions. It also has the potential to buy out some of its minority partners as well as repower some of its wind farms with larger turbines. All of these options would enable the company to generate some incremental cash flow from its legacy portfolio for a small capital investment.

Meanwhile, TerraForm is pursuing on several external opportunities as well. For example, it's developing relationships with renewable power developers both in North American and Europe, which could provide capital to fund their pipeline of projects and acquisitions. It's also working with another renewable power company to potentially commit money to a strategy that would consolidate small solar facilities in Spain. Completing just a few small transactions would enable the company to grow cash flow at the high end of its dividend growth range.

In addition to these smaller deals, TerraForm Power proved that it has the financial backing to make large needle-moving acquisitions if the right opportunity arose. If the company can secure additional opportunistic deals like the one it recently made in Spain, they could power even faster growth.

Plenty of upside still ahead

While investors might have missed TerraForm Power's recent bounce, they haven't lost out on the long-term opportunity. That's because the company is just starting out on its growth journey, which at a minimum should see it increase its high-yielding dividend at a mid-single-digit yearly pace for the next five years, potentially powering double-digit total annual returns from here. In the meantime, there's ample upside to that plan as it makes additional growth-focused investments and needle-moving acquisitions. Those factors make TerraForm one of the top energy stocks to buy right now, in my opinion.

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Matthew DiLallo owns shares of TerraForm Power. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.