NRG Energy had a mediocre 2010 by every generally accepted accounting metric. Revenue and earnings dropped on a 10% decline in net margin (see earnings results here and earnings call transcript here). A major reason for this was pricing pressures created by collapsed natural gas prices. Despite very unexciting 2010 results, NRG Energy is still a good investment based on the thesis article I wrote here.
There is a silver lining to the bad 2010 results. Revenue was down a little over a percent and earnings dropped a jaw-dropping 50%. As a point of comparison, Exelon's (NYSE:EXC) revenue was up 7.5% over 2009, and earnings were down 5%. The major driver of this huge earnings drop at NRG was a billion dollar rise in cost of sales despite flat revenue. This can be attributed to the integration of acquisitions among other factors. Now back to that elusive silver lining.
NRG significantly expanded its solar holdings this year with the acquisition of Green Mountain Energy. The pricetag was $357 million, and the new division is expected to add around $30 million of free cash flow in 2011. This puts the P/CF around 12. The real perk is that Green Mountain has grown by 20% annually over the last decade. If this continues, NRG will earn its money back (through free cash flow) in 7 years, not the 12 that the P/CF ratio suggests.
On top of this case example, there are other elements to NRG's optimism. This type of investment that provides high-teen returns on investment is what NRG is striving for in its expansion into green energy. Moving on, 100% of 2011's baseload energy generation is hedged at NRG. This will significantly mitigate commodity-price risk. The consensus view of management is that natural gas prices have bottomed, but actions speak louder than words and generation is hedged.
Another share repurchase plan has been announced, worth $180 million in 2011. This will translate into roughly 9 million shares at current prices. This is 3.5% of the shares outstanding, and should give a corresponding 3.5% boost to 2011 earnings.
NRG Energy is also a great value. It is trading at two thirds of the $31 of current book value per share, in contrast to Exelon's price-to-book ratio of 2. NRG's 2011 free cash flow per share guidance is between $3.36 and $4.17 per share. This puts the current share price at roughly five times the next 12 month's cash flow. Compare this to Exelon's future price-to-cash flow ratio of 14 for Exelon.
I am holding on to NRG despite the bad 2010 results. There are two reasons for this: the tremendous values presented by the current assets and by the future cash flows. The balance sheet is strong, and management is very optimistic that they can put this cash to work well. Shares have been sliding this week, and should see support around $18.80. I am optimistic alongside management.
Disclosure: I am long NRG.