Utilities Archives - Fountainheadinvesting

Vistra (VST)-A Strong Utility With A Big Focus On Clean energy.

Vistra (VST) $137 One of the better utilities with good operating margins and a big focus on clean energy – worth buying on declines.

As data centers hunger for power and nuclear energy gathers steam, Vistra has already benefited from a 200% YTD rise. Its focus on nuclear energy and clean energy partnerships makes it a strong contender, but a short-term correction should make it more attractive.

Vistra’s biggest source of power generation is still hydrocarbons like natural gas, LNG, and coal, accounting for 56% of its total generation as of the first half of 2024 (H1 2024).

However, with the completion of its acquisition of Ohio based nuclear energy utility Energy Harbor in March this year, its focus on nuclear energy in particular and clean energy in general has increased.

As of H1 2024, nuclear energy accounted for 22.9% of its total energy generation, up from 12.3% in H1 2023. The acquisition also made Vistra the second-biggest nuclear energy generator after CEG. Further, with nuclear energy eligible for production tax credits under the US’s Inflation Reduction Act, Vistra’s earnings can be positively impacted with increased focus on nuclear energy.

The stock’s forward EV/EBITDA at 12.38x is also running higher than its five-year average of 7.95x. VST’s forward non-GAAP price-to-earnings (P/E) ratio at 22.84x is similarly higher than the five-year average of 15.17x and as per analysts’ estimates, will remain so next year as well.

As such, a correction would be better for it in the short term, which should give investors a better buying opportunity.

Vistra is not a pure-play nuclear energy company, and that is perhaps to its advantage – it has the cash cow from traditional energy sources to balance out the volatility from nuclear buildout, safety compliance, and regulations.

AES Corp Is A Decent Utility

AES Corp (AES) $16.85 (Utility, decent dividend yield) Can buy on declines or accumulate don’t expect more than 7%-8% per year, though datacenter operations could be a nice surprise.

Flat for a long time – 10 years the stock returned just 12%, it is down 12% in the past year. Revenues and operating earnings also went nowhere during the same time, selling some legacy coal, and switching to renewable energy,

Earnings growth for the next three years is estimated at 8%, revenue at 4%.

The 4% dividend yield is interesting

BBB debt rated – middle of the pack, most utility dividend investors would prefer at least BBB+.

Core player in the renewable sector, with a growing 25-30 GW portfolio of solar power until 2027 – The trend towards renewable energy helps them.

Expected demand from Datacenters- Some of the company’s major customers include Amazon, Microsoft and Google, major IT businesses, all of whom have Co2-neutral commitments to their operations by 2030 or earlier – and the company’s backlog is over 40% with customers that are large tech companies.

Transitioning from coal and gas-fired power plants to renewables and storage and still has impairment losses due to the coal exit.

Low margins – not efficient, compared to its competitor Brookfield Renewables, AES has a lower dividend yield and a lower EBITDA margin.

These are still high debt levels. $26.5B net debt equals more than two times the current market cap, about eight times the adjusted 2023 EBITDA, and about 26 times the 2023 free cash flow. Three peers BEP, AY and TEC have lower debt ration – some at slightly higher rates but this will improve once rates go down.