NRG Energy (NRG) — a favorite speculative idea for the coming year — operates as an integrated power company in the United States. It operates throughout Texas (69% of 2020 revenues), East (26%), and West (5%), asserts Robert Rapier, editor of Investing Daily's Utility Forecaster.
NRG is involved in 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.
In addition, NRG trades in electric power, natural gas, and related commodities; environmental products; weather products; and financial products, including forwards, futures, options, and swaps.
As of December 31, 2020, NRG owns a power generation portfolio with approximately 23,000 megawatts of capacity at 33 plants. 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.
Currently, the company derives its power primarily from natural gas (43% of its portfolio) and coal (34%). Nuclear power makes up another 5%, but the company’s renewable generation lags many of its peers. However, since Texas is a fossil fuel-friendly state, and that is where most of its business is located, NRG is unlikely to face any punitive renewable portfolio standards.
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 2021 when Winter Storm Uri swept across Texas. In the aftermath NRG reported that it expected a 2021 pretax loss of $975 million largely because of the storm, and cash flow impact of $350 million to $550 million. In response to this announcement, the markets rapidly shaved 17% of value ($1.7 billion in market value) from NRG shares.
But the company bounced back quickly and soared to new all-time highs in the summer, as investors concluded the incident won’t have a lingering impact on the company’s fortunes.
The Consensus Is Bullish
Analysts are bullish on the company. According to FactSet, 58% of the analysts covering NRG have a Buy rating on the company. No analysts have a Sell rating on the company. NRG’s Equity Summary Score — which is a consolidated view of the ratings from several independent research providers at Fidelity – is “Very Bullish.” NRG is the highest-rated 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 97, which is a rating of “Very Undervalued.”
NRG is a solid company that appears deeply undervalued. It should be a good addition for investors who put a higher premium on growth than income. Its 3.1% yield is better than its peer group average, but the upside potential is one of the highest in the group. NRG Energy is a Buy up to $45.
