Looking at NRG Energy’s Current Valuation
Merchant power stocks have seen significant weakness in the last few months. NRG Energy (NRG), the largest of these stocks, has corrected nearly 30% since early July 2016. In comparison, the Utilities Select Sector SPDR ETF (XLU) has corrected nearly 10% in this period.
On November 25, 2016, NRG Energy traded at an EV-to-EBITDA1 valuation multiple of 7x. The average multiple of US merchant power utilities stands just above 8x.
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The EV-to-EBITDA ratio indicates whether a stock is undervalued or overvalued, regardless of the capital structure of the company. EV (enterprise value) is the combination of a company’s debt and market capitalization minus its cash holdings.
NRG Energy may seem fairly valued compared to its peers. However, NRG’s volatile earnings resulted in even more volatile stock price movement, ultimately denting investors’ returns.
NRG Energy’s PE (price-to-earnings) multiple currently stands at 8x. The utility sector’s average multiple is close to 19x. As for NRG’s peers, AES and Calpine are trading at PE multiples of 13x and 11x, respectively.
The recent stock correction may be one of the main reasons behind NRG Energy’s discounted valuation. In comparison, broader utilities (XLU) have also become relatively cheaper due to their fall in the last few months. As a result, they are likely to offer an attractive risk-reward proposition compared to NRG.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩