Some companies are very difficult to analyze. In fact, some have to be broken down into pieces for analysts and investors alike to make sense of them, such as NRG Energy Inc. (NYSE: NRG). The utility operator is now considered to be one of the most complex valuations by Merrill Lynch. The firm has made some sense of it and might see a classic value play with solid upside expected.
First some background on the company. NRG Energy operates a diverse portfolio of fossil fuel and renewable power generation assets totaling 48,000 megawatts (MWs) and a competitive retail business serving 2.2 million customers, mainly in Texas and the Northeast. NRG is also the majority owner of the recently carved out NRG Yield Inc. (NYSE: NYLD), a tax advantaged subsidiary housing predominantly contracted natural gas and renewable power assets.
Merrill Lynch reiterated a Buy rating for NRG with a price objective of $27, implying an upside of 11.3% from current prices. The overall approach to the NRG valuation seeks to separate NRG’s “residual value,” excluding NRG Yield and NRG’s ownership stake in NRG Yield, and value each piece individually.
ALSO READ: 6 Large Oil and Gas Stocks Analysts Want Investors to Buy
NRG Energy is among the highest free cash flow generators in Merrill Lynch’s coverage universe, which provides both valuation support and flexibility to reinvest opportunistically in the business. The firm believes that the newly formed subsidiary NRG Yield possesses a structural cost of capital advantage that will represent a significant engine for growth for both NRG and NRG Yield shareholders independent of the current commodity environment. The exposure to Texas and California power markets is also considered very favorable.
By far the most daunting task for any new investor looking at NRG is its labyrinthine valuation. The firm views NRG’s valuation as more complex than any other name it covers. Yet, NRG’s complexity is also the very reason why Merrill Lynch argues that this is the most interesting name for value investors in the electric utilities space.
According to Merrill Lynch, NRG shares look like a classic value play as they are down 11% year to date and 33% relative to peers Dynegy Inc. (NYSE: DYN) and Calpine Corp. (NYSE: CPN) since the end of July 2014. By the firm’s math, NRG shares trade at a value that effectively offers a free solar development option. Catalysts ahead for NRG are thin, but value investors are recommended to take a closer look.
Shares of NRG were up 1.4% to $24.33 Monday afternoon, in a 52-week trading range of $22.78 to $38.09. The stock has a consensus analyst price target of $32.25.
ALSO READ: Will India Be the Next Major Driver for Alternative Energy?
Want to Retire Early? Start Here (Sponsor)
Want retirement to come a few years earlier than you’d planned? Or are you ready to retire now, but want an extra set of eyes on your finances?
Now you can speak with up to 3 financial experts in your area for FREE. By simply clicking here you can begin to match with financial professionals who can help you build your plan to retire early. And the best part? The first conversation with them is free.
Click here to match with up to 3 financial pros who would be excited to help you make financial decisions.
Have questions about retirement or personal finance? Email us at [email protected]!
By emailing your questions to 24/7 Wall St., you agree to have them published anonymously on a673b.bigscoots-temp.com.
By submitting your story, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
