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Published: August 31, 2009
If NRG Energy Inc. (NYSE: NRG) were an
athletic prospect, scouts would rate it as a “triple threat.”
That’s because the Princeton-based wholesale power generator is
involved in all three of the key energy sources of the future:
Solar, wind and nuclear.
And that’s only part of the reason I like this stock.
Growing profit margins and earnings momentum add to the energy
company’s appeal -- and a rebound in U.S. economic activity
hasn’t even begun in full.
When NRG announced its second-quarter results a few weeks ago,
the company said that its profits tripled from a year ago --
eclipsing Wall Street estimates and setting a new record. It
also boosted its earnings guidance for all of 2009, and
increased its stock-buyback target from its previous $330
million worth of its shares to $500 million.
Income from continuing operations was $432 million -- a marked
improvement over last year’s $41 million loss. And its recent
acquisition of the Texas retail-energy business of Reliant
Energy Inc., now RRI Energy Inc. (NYSE: RRI), is starting
to pay off.
In two months the tie-up has already delivered $200 million of
the planned $400 million in adjusted earnings before income
taxes, depreciation and amortization (essentially a cash-flow
metric that professional investors refer to as “EBITDA”) gains
for the year. With disciplined management this acquisition
should outperform its estimated gains. This analysis is being
recognized as we speak by the market, with unusual January call
option activity in RRI stock last Friday.
NRG has interest in 44 power
plants with 24,005 megawatts (MW)
net ownership, most of which is in
the United States. Plants in Texas
and the Northeast account for almost
18,000 MW. NRG also
has operations in Australia and
Germany.
The company distinguishes itself by
having operating margins that are
roughly double that of its peers --
the product of its efficient fleet
composition and prudent active
energy price hedging policies. The
hedges NRG currently has in place
are likely to outperform analysts’
estimates, as well. That’s because
no analyst wants to be caught
over-estimating upside, especially
in volatile markets like energy
futures. So, Wall Street
consistently undervalues the
expected value of these hedges,
which the firm carries on a
mark-to-market basis. That was the
case in the second quarter.
With respect to the economy,
industrial sector inventories are
very low, meaning they will need to
be replenished in the third quarter.
The government’s Car Allowance
Rebate System (CARS), popularly
known as “Cash for Clunkers,” gave a
nice boost to industrial production,
and some signs of stability and even
some gains -- let’s cross our
fingers -- can be seen in some areas
of the housing market.
We’re by no means out of the woods,
yet, but U.S. gross domestic product
(GDP) did better than expected in
the last quarter -- shrinking by
just -1% -- and is likely to beat
analysts’ expectations in the third
quarter as well. That’s good news
for NRG because the third quarter is
traditionally the most profitable
quarter of the year for utilities.
Prices should firm up, benefiting
this company’s already stellar
return on investment (ROI).
And in addition to being well
positioned to profit in the
short-term, NRG is an outstanding
long-term play because it’s ready to
capitalize on the next stage of
“green” energy development: low
carbon emissions. After all, green
is the color of money.
The company’s natural-gas, new and
existing commercial nuclear, and new
and very large wind-and-solar-power
projects are sure to benefit longer
term from the move towards
environmentally-friendly forms of
energy generation.
With total liquidity of $4 billion,
NRG is in an impeccable position to
develop its planned projects and
take advantage of small
opportunistic acquisitions, should
they appear. The company has a very
prudently managed balance sheet and
a shrewd growth management
discipline, which is an invaluable
attribute in adverse economic
conditions where cash is king.
And let’s say that all of these
advantages that we have outlined
here have not gone unnoticed by the
competition: Two companies in the
last three years have attempted to
acquire NRG. Most recently,
Exelon Corp. (NYSE: EXC)
attempted to buy NRG outright. And
even when the takeover attempt was
rebuffed, NRG stock did not suffer.
Exelon has since backed off from its
acquisition attempt. That
stock-price stability reflects
strong investor confidence in
management’s execution.
At Friday’s closing price of $27.50,
NRG’s stock was still down about
-30% from its 52-week high of $39.09
-- just one of several reasons it
still has room to rise, even after a
scorching +91% run from its 52-week
low of $14.39.
The stock is trading at a low 10
times forward earnings, has been
consistently above its 200-day
moving average since mid-July and is
oversold by many proprietary
measures. This stock could be ripe
for a strong upward move as we
approach the end of the year. What’s
more important is that the intrinsic
long-term value of the company is
undervalued at these prices.
-- Horacio Marquez
Contributing Editor
MoneyMorning.com |
