New York, July 25 (FinanceEnquiry.com) – Analyst Keith Stanley at Deutsche Bank Securities downgrades his rating on the shares of NRG Energy (NYSE: NRG) from BUY to HOLD. The 12-month target price has been raised from $19 to $20.
In a research note published on July 24, the analyst mentions that on a combination of rising prices of gas, excitement over summer optionality in ERCOT and the benefits of the acquisition of GenOn Energy, Inc (NYSE: GEN), stock of NRG Energy now rallied significantly from the April low and due to this, rating has been downgraded. In addition to this, while diluting upside optionality of NRG in the ERCOT market, GEN deal is seen as value neutral to important financial metrics on a recurring basis. Standalone 2014 financial projections of NRG Energy and GEN are pretty much boosting, merger synergies are viewed as achievable.
It means, no material upside in NRG stock and move to the sidelines are seen following latest strength and due to uncertainty in the gas and power markets. Furthermore, with upside optionality from its concentrated exposure to the attractive Texas market, core thesis on stock of NRG has laid its attention on its considerable generation of FCF even at relatively low long-term prices of gas.
As gas market fears have decreased, reforms of ERCOT market have moved forward and now on the back of cost savings from consolidation with GEN, stock of NRG Energy rose 36 percent since the April low. With further material upside over the near term that is likely to be dependent on a second leg in the gas rally or summer heat in Texas, NRG remains as a highly leveraged generator of power after merger.
By applying the baseline 8.0x EV/EBITDA multiple to 2014E open EBITDA on a standalone basis, NRG Energy is valued. Using a DCF analysis, solar is also valued. Given GEN deal is approximately neutral to long-term value, for valuing NRG on a standalone, comfortable approach has been carried. Furthermore, on the back of updated outlook of NRG, target price has been raised by $1 on a modest increase to the estimates of 2013 or 2014.
Higher gas prices and greater merger synergies are considered as upside risks, while weaker gas prices and an inability to monetize solar tax attributes are considered as downside risks. Historical estimated P/E analysis for the years 2012 and 2013 are 16.4 x and 45.4 x, while for 2011, actual P/E analysis was 12.5 x the analyst adds further.
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