NRG Energy: A power play to recharge your portfolio

Posted Apr 7th 2008 3:20PM by Joseph Lazzaro
Filed under: Stocks to Buy

A year or so ago, a 10% total annual return on equity would have been unsatisfactory for many investors.

My, how the U.S. financial landscape has changed from April 2007! A 10% return today doesn't look so bad, and a company that can achieve that and more is utility NRG Energy.

NRG Energy Inc. (NYSE: NRG) is a wholesale power generating company that owns and operates power plants with a net capacity of 22,880 megawatts.

The majority of NRG's revenue is from base load power. The significance? A stable cash flow. Further NRG's power source is largely natural gas-based, which is preferred, given likely additional regulations moving forward for coal-fired plants, as nations address climate change. NRG's power source mix is 45% natural gas, 34% coal, 16% oil, 5% nuclear. NRG's stable includes 175 power generation units at 49 power plants.

NRG's strategy is to repower existing facilities and develop new generating capacity in markets where NRG owns assets, with an emphasis on baseload capacity, long-term power sales agreements, efficiency, and environmental enhancements. So far, NRG business is on-track. The Reuters F2008/F2009 EPS consensus estimates for NRG are $2.28/$2.96.

The risks? Volatile natural gas and electric power commodity markets. The regional natural gas delivery market produces wider price swings than oil, which makes it difficult to project natural gas prices several quarters out. Prolonged, high natural gas prices would hurt NRG's results.

The First Call mean rating for NRG is Buy (14 firms). The mean 2008 target is $51 (high: $56, low: $43).

Stock Analysis: NRG Energy is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from NRG's shares. Consider a stop loss of $28 if you were to purchase shares in this company.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Tags: defensive stocks, inthenews, NRG, NRG Energy, power generation, utilities