Yahoo Finance Will NRG Energy Rise with Attractive-Looking Valuations?
NRG Energy Posts Strong 1Q16 Results: Stock Rises to 8-Month High
Attractive total returns despite trimmed dividends
NRG Energy’s (NRG) shares rose sharply on May 5, 2016, the day the company announced its earnings. NRG stock touched $15.68, its highest intraday peak since early October 2015. It closed near $15 levels by rising 1.6% for the day. Merchant power players displayed a very bleak performance last year due to their large exposure to commodity prices.
Prices are still down nearly ~40% considering their trailing 12-month performance. But on the brighter side, merchant power players rallied along with utilities (VPU) on the favorable interest rate scenario and their super-attractive valuations. So far this year, NRG has risen more than 30%. Dynegy (DYN) and Calpine (CPN) have risen 50% and 3.5%, respectively, since the beginning of the year.
NRG announced almost an 80% dividend cut in last quarter’s earnings call to repay debt. However, the rise in the stock price outperformed many utility peers that quarter.
Valuation
NRG Energy (NRG) is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 9.3x as of May 5, 2016. The EV-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of capital structure. The industry average EV-EBITDA multiple is 9.8x.
NRG’s EV-EBITDA, using estimated EBITDA for 2016, stands at 9.2x. This indicates expectations of higher EBITDA in 2016. NRG Energy’s five-year historical average EV-EBITDA stands at 9.3x.
Dynegy (DYN) has an EV-EBITDA ratio of 10.8x. Calpine’s (CPN) ratio is 11.2x, and AES’s (AES) is 7.9x. NRG’s lower multiple compared to its peers implies a valuation discount that’s likely the result of the high volatility in its earnings.
Next, let’s see if the alluring upside in merchant power players is worth the risk.
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