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Buy, Sell or Hold: Why NRG Energy Inc. (NYSE: NRG) is the Energy Sector’s “Triple-Threat” Profit Play

Horacio Marquez — Mon, 31 Aug 2009 15:00:39 +0000

If NRG Energy Inc. (NYSE: NRG) were an athletic prospect, scouts would rate it as a “triple threat.” That’s because the Princeton-based wholesale power generator is involved in all three of the key energy sources of the future: Solar, wind and nuclear.

And that’s only part of the reason I like this stock.

Growing profit margins and earnings momentum add to the energy company’s appeal – and a rebound in U.S. economic activity hasn’t even begun in full.

When NRG announced its second-quarter results a few weeks ago, the company said that its profits tripled from a year ago – eclipsing Wall Street estimates and setting a new record. It also boosted its earnings guidance for all of 2009, and increased its stock-buyback target from its previous $330 million worth of its shares to $500 million.

Income from continuing operations was $432 million – a marked improvement over last year’s $41 million loss. And its recent acquisition of the Texas retail-energy business of Reliant Energy Inc. [now RRI Energy Inc. (NYSE: RRI)] is starting to pay off.

In two months the tie-up has already delivered $200 million of the planned $400 million in adjusted earnings before income taxes, depreciation and amortization (essentially a cash-flow metric that professional investors refer to as “EBITDA”) gains for the year. With disciplined management this acquisition should outperform its estimated gains. This analysis is being recognized as we speak by the market, with unusual January call option activity in RRI stock last Friday.

NRG has interest in 44 power plants with 24,005 megawatts (MW) net ownership, most of which is in the United States. Plants in Texas and the Northeast account for almost 18,000 MW, giving the company positioning in fairly strong markets where environmental, but NRG also has operations in Australia and Germany.

The company distinguishes itself by having operating margins that are roughly double that of its peers – the product of its efficient fleet composition and prudent active energy price hedging policies. The hedges NRG currently has in place are likely to outperform analysts’ estimates, as well. That’s because no analyst wants to be caught over-estimating upside, especially in volatile markets like energy futures. So, Wall Street consistently undervalues the expected value of these hedges, which the firm carries on a mark-to-market basis. That was the case in the second quarter.

With respect to the economy, industrial sector inventories are very low, meaning they will need to be replenished in the third quarter. The government’s Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” gave a nice boost to industrial production, and some signs of stability and even some gains – let’s cross our fingers –can be seen in some areas of the housing market.

We’re by no means out of the woods, yet, but U.S. gross domestic product (GDP) did better than expected in the last quarter – shrinking by just 1% – and is likely to beat analysts’ expectations in the third quarter as well. That’s good news for NRG because the third quarter is traditionally the most profitable quarter of the year for utilities. Prices should firm up, benefiting this company’s already stellar return on investment (ROI).

And in addition to being well positioned to profit in the short-term, NRG is an outstanding long-term play because it’s ready to capitalize on the next stage of “green” energy development: low carbon emissions. After all, green is the color of money.

The company’s natural-gas, new and existing commercial nuclear, and new and very large wind-and-solar-power projects are sure to benefit longer term from the move towards environmentally-friendly forms of energy generation.

With total liquidity of $4 billion, NRG is in an impeccable position to develop its planned projects and take advantage of small opportunistic acquisitions, should they appear. The company has a very prudently managed balance sheet and a shrewd growth management discipline, which is an invaluable attribute in adverse economic conditions where cash is king.

And let’s say that all of these advantages that we have outlined here have not gone unnoticed by the competition: Two companies in the last three years have attempted to acquire NRG. Most recently, Exelon Corp. (NYSE: EXC) attempted to buy NRG outright. And even when the takeover attempt was rebuffed, NRG stock did not suffer. Exelon has since backed off from its acquisition attempt. That stock-price stability reflects strong investor confidence in management’s execution.

At Friday’s closing price of $27.50, NRG’s stock was still down about 30% from its 52-week high of $39.09 – just one of several reasons it still has room to rise, even after a scorching 91% run from its 52-week low of $14.39.

The stock is trading at a low 10 times forward earnings, has been consistently above its 200-day moving average since mid-July and is oversold by many proprietary measures. This stock could be ripe for a strong upward move as we approach the end of the year. What’s more important is that the intrinsic long-term value of the company is undervalued at these prices.

Recommendation: Buy NRG Energy Inc. (NYSE: NRG) at market (**).

(**) – Special Note of Disclosure: Horacio Marquez holds no interest in NRG Energy Inc.

Source:Buy, Sell or Hold: Why NRG Energy Inc. (NYSE: NRG) is the Energy Sector’s “Triple-Threat” Profit Play

The $68 Billion Pfizer-Wyeth Deal Won’t Revive the Moribund Merger Market

Don Miller — Mon, 02 Feb 2009 21:03:26 +0000

When Pfizer Inc. (PFE) unveiled a $68 billion buyout offer for U.S. rival Wyeth (WYE) last week, it sparked hopes that the deal might re-ignite the moribund merger market. But when the Wall Street dealmakers take a closer look, those flames will likely be doused in cold water.

For those rooting for a revival of buyout activity, the merger of the two companies shows that corporate predators are still on the prowl and adequate financing is still available for some big transactions.

But as Money Morning reported recently as part of its ongoing “Outlook 2009” economic forecasting series, the credit crisis has put the mergers-and-acquisitions (M&A) market into a deep freeze. And not even the marriage of these two U.S. pharmaceutical giants will be enough to thaw out the deal-making market anytime soon.

Both the size of the deal and the players involved represent a unique combination of favorable financing terms and corporate balance sheets that not many other companies can match in the current economic climate.

Pfizer, a company with strong cash flow and lots of cash on its balance sheet, did get $22.5 billion in financing for the Wyeth buyout, but others are unlikely to get the same terms. The drug company has a rare, stellar “AAA” credit rating from Standard & Poor’s Inc.

Furthermore, lenders are “favoring sectors where there is the most stability” in earnings and revenue outlooks, like health-care stocks as well as certain education and technology firms, Howard Lanser, an investment banker at R.W. Baird, told BusinessWeek.

Other sectors such as retail are currently out of favor and likely to stay that way, he said.

That makes a return to the heady days of the mid 2000s – when bountiful M&A activity lined the pockets of Wall Street investment bankers – an unlikely pipe dream.

The volume of global mergers and acquisitions could fall about 35% in 2009 from an expected volume of $3.1 trillion in 2008, investment bankers say. That would be less than half of last year’s record $4.4 trillion in deals.

“There are substantial headwinds facing M&A and the headwinds are not subsiding,” Cary Kochman, co-head for Mergers and Acquisitions for the Americas at UBS AG (UBS), told the Reuters.

The No. 1 issue is the lack of available credit. Banks and other lenders have pulled back from financing deals, making loans, especially for big deals, scarce and more expensive.

“You are less likely to see deal sizes beyond the $20 billion mark in 2009,” said Larry Slaughter, co-head of European M&A for JPMorgan Chase & Co (JPM). “The balance-sheet capacity of the banking system will make it tough to finance much-bigger transactions.”

And fear is playing a close second fiddle to financing as a barrier to any revival of M&A activity. Most firms are holding onto any cash they have as insurance against a prolonged economic downturn.

“It takes a little courage to step forward and pursue M&A in this environment,” Lanser says. “To spend that cash can be a big psychological hurdle.”

Private Equity & Hedge Funds No Help

Even the so-called “masters of the M&A universe” – the leveraged buyout firms – are unlikely to ride to the rescue this time.

The Blackstone Group LP (BX), the No. 1 leveraged-buyout firm is staying on the sidelines searching for profits by advising companies in restructuring distressed debt.

The company that orchestrated a then record $34 billion acquisition of Equity Office Properties Trust in 2007 is playing a more modest role working consulting with AIG (AIG), as it sheds units worth about $60 billion to repay the government after its bailout last year.

Bankruptcies at investment banking’s most-hallowed companies like Bear Stearns and Lehman Bros Holdings Inc. (LEHMQ) obliterated the global financial system after buyout firms helped inflate the credit bubble. Now the private equity and hedge funds may be next to go, as LBO deal making enters the gravest crisis in its 40-year history.

Buyout firms such as KKR & Co. (KKR) and the Carlyle Group went on a record-breaking shopping spree in 2006-07, saddling themselves with $1.5 trillion in assets that they intended to sell for a profit. Since then, they haven’t been able to find buyers so they can reap the 20% profits they get for such deals.

“This is part of the biggest bubble to burst in our history.” Roy Smith, a former Goldman, Sachs & Co. (GS) partner told Bloomberg News. As many as 40 of the biggest 100 companies may collapse by 2011 as their debt- strapped assets default, according to a 2008 report by Boston Consulting Group Inc.

“These guys had a sense they could do no wrong,” Paul Schaye, managing partner of New York-based Chestnut Hill Partners, told Bloomberg.. “ Now they’re going through a very sobering experience. They have to figure out how to survive this environment.”

So what will persuade dealmakers to take on added risk in such a gloomy environment? Turns out the the very things preventing consolidation now – the recession and credit crunch – could spark the revival Wall Street craves.

Only the Fit Survive

“There is going to be a need for a lot of companies to consolidate to survive,” Mark DeGennaro, managing director at investment bank Gruppo, Levey & Co. told Bloomberg. Firms with falling sales figures and credit trouble may have no choice but to find buyers – often at very low prices, he said.

Corporations with cash on their balance sheets or stronger share prices have been taking advantage of the drop in equity valuations among their rivals to do deals.

In fact, 2008 was marked by a jump in hostile or unsolicited deal activity, including InBev’s (ABI) planned acquisition of Anheuser-Busch Cos. Inc. (BUD) and Exelon Corp.’s (EXC) bid for NRG Energy Inc. (NRG).

And despite the obvious risks, some private equity firms will still dip their toes in the LBO waters.

“The best returns in private equity have come in a period like the one we’re just entering,” Blackstone founder Stephen A. Schwarzman said in a speech to investors and buyout firms in Dubai in October. “This is an absolute wonderful time.”

Another traditional provider of capital – sovereign wealth funds – may also step up to the plate.

“Even though the price of oil is volatile, they have substantial amounts of money…they need to get to work and generate a reasonable rate of return,” Alan Alpert Senior Partner of M&A Transaction Services at Deloitte Touche Tohmatsu told Boardmember.com. “I think you’ll see sovereign wealth funds come back into the U.S. market and make investments.”

Source: The $68 Billion Pfizer-Wyeth Deal Won’t Revive the Moribund Merger Market

Protect Your Portfolio With These 3 ‘Safe Haven’ Sectors

Martin Denholm — Mon, 05 Jan 2009 13:15:10 +0000

It’s clear that 2009 is going to be grim in economic terms. Martin Denholm says investors should stick to sectors that fare better during recessions. The healthcare sector, discount retailers and utilities companies provide essential products and generate repeat business. Martin picks the strongest companies in these “safe haven” sectors.

This from Smart Profits Report

A Healthcare Haven

It stands to reason that the sectors and companies that traditionally fare better during economic recessions are those that garner essential repeat business.

As my colleague Marc Lichtenfeld has pointed out many times here before, that includes the healthcare and biotech sectors. And far from procrastinating, Marc just issued his “Five Predictions For The Healthcare Sector In 2009″ for Xcelerated Profits Report subscribers in the January issue. If you’re not a subscriber, you should be! You can get more information on that here.

No matter what happens with the broader economy, people will still get sick and will still need drugs and medicines. With a growing population and people living longer, the long-term prospects for healthcare remain excellent.

But in a poor economic and investing climate, your best bet is to stick with the powerhouse pharmaceutical companies like Johnson & Johnson (NYSE:JNJ) and Proctor & Gamble (NYSE:PG), which are masters of the “razor-and-blade model” (basically, once a consumer buys a razor from the company, he/she needs to keep buying blades for it, thus generating repeat business). In the biotech world, look at big boys like Genentech (NYSE:DNA) and Gilead Sciences (Nasdaq:GILD).

Food, Glorious Food (And A Bunch Of Other Stuff, Too)

If people regularly require medicines and drugs, they need everyday essentials like food and drink even more. And while the retail sector is struggling overall, there are some companies that should fare well as the economy stumbles and consumers cut back.

You got it… discount retailers. Okay, so I know pretty much all retailers are slashing prices these days in a desperate bid to get folks to spend their hard-earned dough. But the ones who already boast a discount model as their bread-and-butter are better prepared. That includes sector bellwether Wal-Mart (NYSE:WMT), plus bulk goods stores like Costco (Nasdaq:COST) and BJ’s Wholesale Club (NYSE:BJ), which also offer a huge range of items at bargain-basement prices.

Switch On And Profit

Another favorite safe haven sector during economic downturns is utilities. Again, the companies within it produce goods that consumers can’t live without: Energy and power such as electricity.

The Dow Jones Utility Average (^DJU) includes major power producers like American Electric Power Company (NYSE:AEP), Exelon Corporation (NYSE:EXC), Consolidated Edison (NYSE:ED), and Southern Company (NYSE:SO), which generate reliable, repeat revenues and also pay hefty dividends.

And speaking of dividends, you could head to tiny Luxembourg this New Year and pick up a beefy one with steelmaker Arcelor-Mittal (NYSE:MT). A Business Week article cites the company as a potential turnaround performer next year, stating:
“Most analysts think it’s unlikely that Old World bourses will rally before the second half of 2009. Still, investors with more appetite for risk – and a willingness to pore over balance sheets – can find some good values even in cyclical businesses such as manufacturing. Bleak earnings outlooks have already been factored into many share prices.”

And having endured a brutal 2008, slumping from $78 to $24 a share, Arcelor-Mittal has announced widespread cost-cutting measures that includes shedding 9,000 jobs in a bid to save $1 billion. Its forward Price-to-Earnings ratio is just 2 and with Obama’s infrastructure revolution set to get underway in 2009, the global steel giant could be well poised to profit from it.

The “No-Hype” ‘09

As 2008 thankfully disappears, it will be more important than ever to stick to the tried-and-tested investing principles in 2009.

Right off the bat, that includes being very watchful for hype. In a down market, some companies will undoubtedly be keen to gloss over or downplay any bad news, for fear of causing harm to their stock prices in an already weak market.

Make sure the companies you invest in boast strong, honest management teams, with minimal spin and no excuses. It sounds simple, but look for companies with competitive advantages and which continue to grow revenues and earnings and even pay dividends as a key sign that they’re probably still in good shape.

Remember that with recession hanging over the economy – one projected to be the worst and longest since 1982 – upward momentum could be tough to achieve. Investors are still very skeptical and, among other things, are likely waiting for GDP growth to improve (or at least not be revised lower)… for corporate earnings to beef up… for job losses to ease… for Obama’s tax cuts… and to see what kind of effect Obama’s huge economic stimulus package proposal has. It will arguably take something around $750 billion to provoke much sustained, positive reaction.

So be very wary about bold statements, proclaiming that we’ve seen a bottom in the stock market. We probably haven’t yet. Meantime, consider some of the companies mentioned above and/or those that pay dividends.

Source: Three “Safe Haven” Sectors For Your 2009 Portfolio

What if the Lights Go Out?

Andrew Snyder — Fri, 18 Apr 2008 20:48:28 +0000

If a Democrat somehow steals his or her, of course way into the Oval Office, alternative energy is going to be a fantastic investment.

You should be glad you do not live in Juneau, Alaska. And if by a 1 in a 100,000 chance you do live in Juneau, turn off your computer. You are wasting precious electricity.

While it is not making any mainstream headlines today, Alaska’s capital is in a state of emergency. A series of major avalanches has taken out the lines that connect Juneau to the hydroelectric source that creates its power.

With nearly two miles of lines down, and no safe access routes for up to a month, the city is in big trouble. It has been forced to switch to huge diesel backup generators. They will be running full power for at least three months until the lines are repaired.

The freak incident will cause huge amounts of financial hardship in the area. As you can probably figure, diesel generators are a bit more expensive to operate than a dam. Juneau’s generators are burning about 100,000 gallons of diesel a day. And with diesel already going for a premium (remember there are no roads into the town to deliver fuel), the city’s fuel bill from this incident will be over $400,000 per day.

You want how much?!

Thanks to the rare ability for the city’s power provider to almost immediately raise its rates, Juneau’s citizens will be forced to pay about four times the normal amount when their next bill arrives. Prices are expected to soar from eleven cents per kilowatt to fifty cents or more. The fallout will not be pretty for this tiny town.

I know what you are thinking, “Boy, that stinks for them. Good thing it can never happen where I live.”

You are probably right. For those of us who live “on the grid,” a major, long-term blackout is highly unlikely, but this is another great reminder of how energy dependent this nation is. We are hooked on the stuff and no form of intervention is going to get this monkey of our back.

The only thing left to do is invest in the stuff and at least profit from the dangerous addiction. For decades, smart investors have been turning towards the nation’s utilities when the economy gets shaky. They make good, safe investments that often pay a hefty dividend.

Even though some may say we have reached the bottom of this economic downturn, I think the worst is yet to come. That means, as Jim Cramer loves to yell… buy, buy, buy.

Keep the juices flowing

Electric utilities are a great option right now. The market is finally being opened to competition, legislatures are allowing power producers to raise their rates, and the nation continues to expand its energy consumption.

Some of the best utilities to look at are the ones working in non-regulated markets, or the ones smart enough to working with wind, solar, or other forms of alternative energy. If a Democrat somehow steals his (or her, of course) way into the Oval Office, alternative energy is going to be a fantastic investment.

One company worth taking a look at is Exelon Corp. (EXC:NYSE). Its share price has nearly quadrupled in the past five years, and it pays 2.4% dividend.

There are dozens of similar mega-producers out there just like one. Start your research with the company that sells you your electricity and work out from there. Almost all of them are a wise investment, especially if the economy weakens any further.

The cost of nearly everything is on the rise in this country. Investing in the nation’s utilities is a great way to get some of that money working for you again.