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Calpine Is One of the Cheapest Utilities Today

Travis Miller

Travis Miller: For utility investors willing to take a little more risk, our favorite utility right now is Calpine. Calpine is an independent power producer that owns power plants across the U.S., primarily in the mid-Atlantic region and Texas.

What we like about Calpine right now is that it trades at a 17% free cash flow yield, based on our estimates, and it has very stable cash flows. Independent power producers typically get a bad rep for the volatility that they experience, but Calpine is different. Its natural gas plants benefit in both a low gas environment and in a high gas environment, creating a stable string of cash flows. The cash flow yield is very attractive for investors, and management has done a good job returning cash through share buybacks over the years. Their debt reduction also is a key part of their strategy.

The stock trades at a 35% discount to our fair value estimate, making it one of the cheapest utilities and a very attractive name given its free cash flow profile.