With a market value of $5.3 billion, NRG Energy (NRG) has seen a remarkable rally so far in 2017. The company’s momentum accelerated when Elliott Associates noted that the stock was “deeply undervalued.” On January 17, 2017, Elliott Associates and Bluescape Energy Partners disclosed their combined 9.4% stake in NRG Energy, the country’s largest merchant power producer.
On February 28, 2017, NRG Energy stock was trading at an EV-to-EBITDA[1. 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’s five-year historical average EV-to-EBITDA ratio is ~11x.
The EV-to-EBITDA ratio indicates whether a stock is overvalued or undervalued, regardless of the company’s capital structure. EV (enterprise value) is the sum of a company’s debt and market capitalization minus its cash holdings.
Valuation of peer merchant power stocks
Please read Will Merchant Power Stocks Be Less Volatile This Year? for more information about this sector of the power industry.
NRG Energy stock has rallied more than 53% in the last year. NRG stock still appears to be trading at a fair discount to the industry average and to its historical average.
In the next part, we’ll see what 2017 could hold for NRG Energy stock.