NRG Energy, Inc.’s NRG cost-saving initiatives, acquisitions and share buyback strategy will support its long-term growth objectives.
For 2019, earnings estimates moved up 8.41% to $4.38 per share in the past 30 days. For 2020, the same inched up 1.78% to $5.71 in the same period.
Additionally, the company delivered an average four-quarter positive earnings surprise of 12.62%.
In the past three months, shares of the company have returned 13% compared with the industry’s growth of 1.4%.
What’s Driving the Stock?
NRG Energy initiated its three-year Transformation Plan in July 2017. The plan is designed to strengthen earnings, increase cost savings and boost shareholder’s value. The company expects to fully implement it by the end of 2020. Under this plan, the company has realized $401 million of cost savings and $53 million of margin enhancements as of Sep 30, 2019. It is on track to realize $590 million of cost savings and $135 million of margin enhancements in 2019.
In the past few years, the company has made significant progress in its transformation to an integrated power company through focus on customers. It sells electricity to a wide variety of customers and none of them contributed more than 10% to the company’s revenues as of Sep 30, 2019. Since the company does not depend on a single customer to generate revenues, migration of customers to other operators is not going to make a significant impact on earnings.
NRG Energy expects to conduct business at the highest level of operational performance. Additionally, its predictable earnings, benefits from growth in retail business will enable it to generate excess of cash through 2019. The company is focused on perfecting its integrated platform. In August 2019, the company closed the acquisition of Stream Energy, which boosted its national multi-brand retail leadership position and adds 450,000 customers.
Considering disciplined capital allocation principles, the company increased its 2020 annual dividend from 12 cents per share to $1.20, with target annual growth rate of 7-9%.
However, intense competition in the wholesale power markets may hurt NRG Energy’s margins. Many facilities operated by the company are old and require periodic upgrading, improvement, maintenance and repair. Even with upgrades and repair, these facilities' output can be low and there might be unplanned outages. These factors are likely to cause low production, which in turn, can impact profitability.
Zacks Rank & VGM Score
The stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NRG Energy has an impressive VGM Score of A. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Back tested results show that stocks with a favorable VGM Score of A or B coupled with a bullish Zacks Rank are the best investment options.
Stocks to Consider
Other top-ranked stocks from the same industry are Eversource Energy ES, FirstEnergy Corporation FE and Fortis Inc FTS. All the three stocks hold a Zacks Rank #2 (Buy).
Long-term earnings growth of Eversource, FirstEnergy and Fortis is pegged at 5.6%, 6% and 5.7%, respectively.
Eversource, FirstEnergy and Fortis delivered an average positive earnings surprise of 2.39%, 2.87% and 4.14% in the last four quarters, respectively.
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