NRG Energy (NRG) operates as an integrated power company in the United States. It operates throughout Texas (69% of 2020 revenues), East (26%), and West (5%), notes utility sector expert Robert Rapier, editor of Investing Daily's Utility Forecaster.
The company is involved in the producing, selling, and delivering electricity and related products and services to 3.6 million residential, industrial, and commercial consumers. It generates electricity using natural gas, coal, oil, solar, nuclear, and battery storage.
NRG Energy, Inc. was founded in 1989, and following the recent completion of NRG’s $3.6 billion acquisition of Direct Energy the company headquarters are being relocated from Princeton, New Jersey to Houston, Texas.
NRG is a bit riskier than conventional regulated electric utilities, in that it has substantial exposure to wholesale energy markets. This provides more potential long-term upside for the company, but at the risk that sometimes the markets will turn against them.
That happened in the first quarter of this year with Winter Storm Uri that swept across Texas in February. NRG reported that it expects a 2021 pretax loss of $975 million largely as a result of the storm, and cash flow impact of $350 million to $550 million. In response to this announcement, the markets rapidly shaved 16.7% of value ($1.7 billion in market value) from NRG shares.
Why, then, am I adding the company to the Growth Portfolio? Because I think the market reaction is overdone. You can now buy shares for 23% less than you could two months ago. Yes, there is a reason for that, but we have to consider whether this incident will have a lingering impact on the company’s fortunes.
In recent years, NRG has been a cash-generating machine. After this year’s earnings hit, which is already priced into the stock, next year’s earnings are projected to be back to normal levels. Further, free cash flow, one of the most important metrics for an income-generating stock, is projected to reach record levels in 2022.
There is an additional factor to consider. Mauricio Gutierrez, NRG’s president and CEO, told analysts that the company is working closely with Texas legislators on proposals that could help mitigate the cost of the disaster for the power company and other key market players.
Analysts are generally bullish on the company. FactSet has a consensus analyst rating of 1.46, which is a reasonably strong buy rating. No analysts have a sell rating on the company. Fidelity rates it as “Neutral”, but that’s still the third highest ranking electric utility in Fidelity’s database.
The S&P Global Market Intelligence (GMI) Valuation is an independent rating that evaluates each company against its peers in several categories, including cash flow and book value metrics. The GMI rating for NRG is 83, which is a rating of “very undervalued.”
The company has a higher 5-year beta than most utilities in its class at 0.82, but that comes with the potential for a higher payoff over time.
The most compelling argument right now is that NRG is a solid company that is deeply discounted. Even if it doesn’t get any relief from the Texas legislature, the hit to earnings is going to be temporary. That means the discount is also likely to be temporary.
If we ignore the impacts from the storm, NRG has all the characteristics I am looking for in an electric utility. It should be a good addition for investors who put a higher premium on growth than income.
Its 3.7% yield is actually better than the group average, but the upside potential is one of the highest in the group. NRG is a new "Buy" in the Growth Portfolio up to $45 a share.
