Where Could NRG Energy Stock Land after Its 4Q15 Earnings?
Market performance
Leading merchant power producer NRG Energy (NRG) had a rough year in 2015, with its stock correcting by more than 65%. Volatile merchant power prices and the poor performance of the solar business during the year led to the fall.
However, utilities at large corrected 8.5%. NRG’s peers Dynegy and Calpine also displayed bleak performances and dropped by 56% and 35%, respectively in 2015. So far in 2016, NRG has lost more than 10% while utilities displayed positive momentum. The chart below shows the comparative stock price movement of leading merchant power players with that of utilities as a whole.
Valuation
NRG Energy (NRG) is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 7x, as of February 17, 2016. The EV-to-EBITDA multiple is a valuation metric that indicates whether a stock is overvalued or undervalued, regardless of capital structure. The utility sector’s (FXU) average EV-to-EBITDA multiple is 8.7x. For 2016, NRG’s EV-to-EBITDA using the estimated EBITDA stands at 7.6x. This indicates expectations of a lower EBITDA in 2016.
NRG Energy’s five-year historical average EV-to-EBITDA stands at 9.3x. This implies NRG is currently trading at a 32% discount of its historical average valuation.
NRG’s peer Dynegy (DYN) has an EV-to-EBITDA ratio of 10.6x, Calpine’s (CPN) ratio is 9.7x, and AES Corporation’s (AES) ratio is 7.4x. NRG’s lower multiple implies a valuation discount that is likely attributed to the high volatility in its earnings.
Dividends
The dividend yield of NRG Energy currently stands at 6% as of February 17, 2016. Yields of independent power players went up sharply as their stocks have fallen significantly since last year. NRG’s forward annual dividend yield stands near its current levels, according to analysts.
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