NRG Energy: Market performance
With $8.0 billion of market capitalization, NRG Energy (NRG) is the smallest constituent of the S&P 500 Utilities Index (XLU). NRG Energy stock has surged 70% in the last 12 months while XLU is currently trading at its levels of 2Q16.
NRG stock has been on a wild bull run since January 2017 after activist shareholders Elliott Management and Bluescape Energy Partners disclosed their stakes in the largest merchant power player.
The largest utility by market capitalization, NextEra Energy (NEE) rose 10%, and Southern Company (SO) stock has corrected by more than 14% in the last one-year period. The SPDR S&P 500 ETF (SPX-INDEX) (SPY) rose 14% during this period.
NRG Energy stock has turned expensive in the last few months. It is currently trading at an EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] valuation multiple of 13x. It appears to be trading at a significant premium compared to its five-year historical average valuation of 11x and utilities’ average (XLU) valuation multiple of 10x.
It could be hard to believe for some that NRG stock, which was hovering around $14.00 levels when Elliott Management claimed that NRG stock was “deeply undervalued” early this year, is currently trading beyond $25.00 levels.
US utility stocks have been trading at a premium for quite some time. Industry leader Duke Energy (DUK) is trading at an EV-to-EBITDA valuation of 12x. NextEra Energy (NEE), the renewables leader in the sector, is currently trading at a valuation multiple of 13x.
NRG Energy stock has outperformed large-cap regulated utilities by a massive margin. Merchant power stocks are considered relatively risky compared to regulated utilities due to the earnings stability of regulated utilities. To learn more about top utilities in the sector, please read The Best Utility Stock out There: NEE, DUK, or SO?