NRG, DYN, and CPN: How Are Merchant Stocks Currently Valued?
On December 23, 2016, NRG Energy (NRG) traded at an EV-to-EBITDA1 valuation multiple of 9x. The average multiple of US merchant power utilities stands just above 8x. NRG’s five-year historical average EV-to-EBITDA ratio comes to 11x.
NRG Energy may seem fairly valued compared to its peers and its historical average. However, NRG’s volatile earnings resulted in even more volatile stock price movement, ultimately denting investors’ returns.
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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 in the longer term
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. NRG has corrected nearly 30% in the second half of 2016 while utilities at large, have corrected nearly 10% in the same period.
Some market experts criticize NRG Energy’s presence in the S&P 500 index because it’s the only unregulated independent power producer and has eroded massive capital in the last couple of years. Unlike utilities (XLU), which have betas below 0.50, NRG Energy’s beta stands above 1.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩