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These S&P 500 Utilities Offer Big Upsides after the Rate Hike

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Part 4
These S&P 500 Utilities Offer Big Upsides after the Rate Hike PART 4 OF 13

Is NRG Energy Stock Fairly Valued after its Epic Rally?

NRG Energy: Valuation

Elliott Management referred to NRG Energy (NRG) as “deeply undervalued” when it disclosed a stake in the largest merchant power producer early this year. NRG stock has rallied more than 17% since.

Currently, NRG stock is trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 9.7x. US utilities’ (XLU) average ratio stands just above 10x. NRG’s five-year historical average EV-to-EBITDA ratio is 11x. Interestingly, NRG shares seem to be trading at a fair discount to the industry average and its historical average.

Is NRG Energy Stock Fairly Valued after its Epic Rally?

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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 is the combination of a company’s debt and market capitalization minus its cash holdings.

Peer comparison

NRG Energy peer Calpine (CPN) is currently trading at an EV-to-EBITDA ratio of 10x, while Dynegy (DYN) is trading at a ratio of ~11x.

Many S&P 500 utility giants seem to be trading at a premium. Southern Company (SO) and NextEra Energy (NEE) are trading at a valuation ratio of 12x.

With a market value of $5.3 billion, NRG Energy (NRG) has seen a remarkable rally so far in 2017. In the last year, the stock has managed to gain nearly 30%. For more information on the merchant power industry, read Will Merchant Power Stocks Be Less Volatile This Year?

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