NRG Energy (NRG) stock seems to be trading at a fair valuation compared to the industry average and its historical average. On March 21, 2017, the stock was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 10.0x. The average multiple of US utilities (XLU) is just above 10.0x. NRG’s five-year historical average EV-to-EBITDA ratio is about 11.0x.
The EV-to-EBITDA ratio provides a comparative idea of a company’s valuation, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt minus its cash holdings.
By comparison, peer merchant power players Dynegy and Calpine are trading at EV-to-EBITDA valuation multiples of 9.3x and 10.0x, respectively.
Merchant stocks may appear to be attractively priced compared to the broader utilities. But broader utilities tend to offer a much better risk and reward proposition compared to merchant stocks. It’s worth noting that merchant stocks could be very volatile, which may lead to capital erosion. On the other hand, utilities at large have stable stock movements along with stable dividend incomes.
For more on this, be sure to read Will Merchant Power Stocks Be Less Volatile This Year?