NRG Energy Earnings: Big Boost From Hot Weather in Texas, Good Execution

We plan to raise our fair value estimate for NRG Energy NRG by about 5% after it announced impressive third-quarter results and a 2024 outlook that slightly exceeds our forecast. We are reaffirming our no-moat rating and High Morningstar Uncertainty Rating.

NRG Energy reported $973 million of adjusted EBITDA in the third quarter, including $225 million from the Vivint acquisition that closed in March. NRG’s legacy business EBITDA was up 56% to $748 million in the quarter and is up 37% year to date, tracking slightly ahead of our full-year forecast and management’s initial 2023 full-year guidance range. Vivint’s $515 million year-to-date EBITDA also is running slightly ahead of our forecast.

As we expected, an unusually warm summer and record-breaking electricity demand in Texas boosted third-quarter results. Texas segment EBITDA climbed to $552 million from $196 million in the third quarter of 2022 and is on track to more than double from 2022 for the full year.

We are reaffirming our long-term outlook, limiting the impact on our fair value estimate from the strong 2023 performance. We continue to forecast $3.5 billion of EBITDA in 2026, including the Vivint synergies. Management’s 2024 EBITDA guidance range is $3.3 billion to $3.55 billion.

NRG’s stock has rallied from $31 per share to $45 this year, recovering all of the 27% drop in the stock in the days around the Vivint deal announcement in December 2022. We now consider the stock 20% overvalued after starting the year 17% undervalued. Ironically, NRG’s solid execution and stock price rally likely has resulted in huge gains for activist investor Elliott Management, which urged NRG to unwind the Vivint deal early this year.

Management continues allocating most of its cash flow—including proceeds from the $1.75 billion South Texas Project sale that closed Nov. 1—to stock buybacks. These buybacks will be mostly value-neutral if the stock trades near our fair value estimate.