Stock Analysis & Ideas

Will NRG Energy Address The Surging Power Demand This Summer?

Story Highlights

Power demand is reaching all-time highs amid heat waves while peak summertime is yet to come. NRG seems set to ride this demand wave.  

The Fed just undertook the biggest rate hike since 1994. Inflation continues to soar, and more rate hikes may be around the corner. With the possibility of a recession growing by the day, consumers will resort to cutting down on spending.

In these times, it pays to sell a product that people simply cannot live without. This makes electric utility company NRG Energy (NRG) extremely resilient to inflation and recession as people simply cannot go without heat or light.

It is one of the largest independent power suppliers and caters to about six million residential and commercial customers. NRG’s recent Q1 turnaround on the bottom line and the addition of Direct Energy remain two major positives for the stock. The stock has enjoyed positive momentum recently given its ability to pass higher costs onto consumers.

Most importantly, NRG has signed renewable power purchase agreements (PPAs) to cater to areas in Texas. This move should help NRG reap handsome rewards given the severe heat wave in the state, which has led to record levels of power demand (75,000 MW on June 12).

This demand is expected to rise further as peak summer demand is attained in September and extreme weather events continue unabated in this second-most populous U.S. state.

Value Creation

Along with this favorable business momentum, a $1 billion share buyback program and steady dividend distribution are the two major factors creating value for investors.

At the end of April 2022, $699 million remained under the stock buyback program, which NRG expects to execute by the end of 2022. Further, NRG has been consistently doling out dividends while also increasing them steadily. The stock currently has a dividend yield of 3.41%, which is far ahead of the sector average of 2.79%.

Investor Sentiment

These multiple positives seem to be putting NRG on the radars of TipRanks readers already. Our database indicates investor sentiment in the stock remains very positive. The number of top investors on TipRanks who hold NRG has increased by 5% in the last 30 days alone.

Wall Street’s Take And Valuation

The Street currently has a Hold consensus rating on NRG with a price target of $43, implying a 16.67% potential upside. That’s after a 13.9% drop in the share price over the past month.

This recent price decline and a P/E ratio of 2.4 make NRG even more attractive. The stock has a return on equity of 122.35% and asset growth of 53.2%, but still has a price-to-sales ratio of 0.35. This implies investors have to pay 35 cents for each sales dollar generated by NRG.

Closing Note

A combination of strong fundamentals, attractive valuations, and soaring power demand makes NRG an attractive defensive play in the current cycle of rate hikes.

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