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Analyzing NRG Energy’s Current Valuation

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Valuation

NRG Energy (NRG) stock seems to be trading at a fair discount compared to the industry average and its historical average. On February 17, 2017, the stock was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 9x. The average multiple of US utilities (XLU) stands just above 10x. NRG Energy’s five-year historical average EV-to-EBITDA ratio comes to 11x.

Currently, NRG Energy peer Calpine (CPN) is trading at an EV-to-EBITDA valuation multiple of 10x, while Dynegy (DYN) is trading at a valuation multiple near 11x.

NRG val

The EV-to-EBITDA ratio gives a comparative idea of the valuation of a company, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt minus its cash holdings.

By comparison, large-cap peer-regulated utilities such as NextEra Energy (NEE) and Southern Company (SO) have a valuation multiple near 12x. Duke Energy has an EV-to-EBITDA ratio near 10.4x.

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NRG stock turned pricey

NRG Energy stock has become significantly expensive compared to its valuation a couple of months back. The momentum in NRG stock has magnified after Elliott and Bluescape Energy Partners disclosed their stake in the company.

Investors might find the valuation of merchant power stocks alluring. They often have attractive price targets. However, it’s important to note that they can be very risky due to their volatile stock movements, largely driven by their relatively less stable earnings.

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