NRG Energy: Elliott Is Back but Upside Less Attractive Than 2017 Effort

We are reaffirming our $37 fair value estimate for NRG Energy NRG after the company confirmed that activist investor Elliott Management holds a 13% economic interest and is pushing for strategic changes. We are reaffirming our no-moat rating and High Morningstar Uncertainty Rating.

Elliott likely built its stake during the last four months since NRG was not listed on Elliott’s holdings form 13-F at the end of 2022. We agree with Elliott that NRG has been undervalued since the stock dropped 22% in December following the $5.2 billion Vivint acquisition announcement.

Elliott more than doubled its money the last time it took an activist stake in NRG in 2016-18. We also thought the stock was 30% undervalued in 2016 before its 2017 rally. During that time, NRG accelerated its cost savings plan, divested its stake in NRG Yield, reduced debt, and tilted its business mix toward retail supply and away from conventional generation.

We don’t think there is as much upside this time. We think it’s unlikely NRG will unwind the Vivint acquisition, one of Elliott’s suggestions, according to reports. We considered the deal value-neutral, so unwinding it would not have a material impact on our fair value estimate. We think there is more upside if management integrates Vivint and tops the $400 million of synergies by 2025.

We also think there is limited value in expanding NRG’s retail business, which is approaching three fourths of NRG’s earnings. We think the retail business has no economic moat and only provides incremental value when paired with NRG’s wholesale generation.

We continue to expect adjusted 2023 EBITDA in line with management’s $3.0 billion-$3.25 billion guidance. With little core business growth, we think EBITDA including Vivint will stay at this level unless NRG can achieve the synergy target. We don’t consider NRG’s leverage a concern based on management’s plan to retire $900 million of debt this year and raise $500 million from generation asset sales.