Did NRG Energy Just Become a Screaming Buy?

The firm noted that the sharply negative NRG share response to a well-reasoned plan to address market worries was clearly a surprise. Credit Suisse appreciates the frustration with power stock performance, but it still sees enough intrinsic value in NRG shares that it cannot convince itself to take the easy way out by abandoning the stock. In simplest of terms, NRG has a clear path to return 17% of its current market cap to shareholders over the next 15 months through buybacks and dividends.

The company has $251 million of 2015 buybacks still to come, another $150 million that was tagged on the call and about $50 million of dividends in the fourth quarter of 2015, totaling $450 million of return to shareholders in 2015. Add to that, an assumed $500 million buyback in 2016, based on the capital allocation plan provided, $200 million of dividends and any incremental free cash they generate from operations, which they see as $0-to-300 million (and treat as $0 in this discussion). So, over the next 15 months, $1.15 billion will be returned to shareholders, against the current market cap of $6.1 billion. This is a huge return of cash that will not come from the other commodity cyclical stocks NRG has been trading alongside.

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In its report Credit Suisse detailed:

The sharply negative NRG share response to what we — and the calmer minds we have spoken with — saw as a well-reasoned plan to address market worries was clearly a surprise, feeling in many ways like capitulation on competitive power broadly and the better known NRG specifically. We appreciate the frustration with power stock performance — further compounded by complaints about NRG’s complexity — from a market looking to duck commodity exposure in a risk off backdrop, but we still see enough intrinsic value in NRG shares that we can’t bring ourselves to take the easy way out by abandoning the stock. In simplest of terms, NRG has a clear path to return 17% of its current market cap to shareholders over the next 15 months through buybacks and dividends while also paying down $650 MM of debt before stepping into a period of even richer free cash generation in 2017+, where we see punitive free cash flow definitions still producing $1 BN annually and growing. We get it: sentiment can be a tough battle and stock weakness makes it harder to find buying conviction, but the core business is doing much better for investors than the market seems willing to credit.

Shares of NRG were down 2.5% to $17.55 Monday afternoon. The stock has a consensus analyst price target of $28.58, and pushing the low on its 52-week trading range of $17.42 to $33.92.