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Endesa's Regulated Businesses Weather Inflation, And We Believe In Nuclear

Mar. 08, 2021 6:17 AM ETEndesa, S.A. (ELEZF), ELEZYENLAY, ESOCF


  • Regulated utilities, despite their issues, are resistant to inflation due to in-built mechanisms for remuneration.
  • In generation, Endesa has substantial nuclear assets, which explains its discount.
  • In an inflationary environment, we like commodities, including electricity, and we think that nuclear will have to be appreciated as necessary eventually by the renewable crowd.
  • With a substantial dividend yield also forming part of the appeal of this stock, we see only political risks, largely priced in, being the only ones facing Endesa.
  • As such, we think it is a speculative buy to which we intend to have some small exposure.

We are positioning against inflation, and as such, we have begun to eschew stocks that don't have inflation hedges and are at risk of erosion of real value of their fixed contracts. Commodities tend to be the most suitable in an inflationary environment since their value is derived from some of the most liquid of markets. Last time we checked, electricity is a commodity, and thus we have started to give utilities a big look once again. Among them we have honed in on a specifically interesting opportunity, which although speculative will form part of our utility exposure due to its high optionality. This opportunity is Endesa (OTCPK:ELEZF), an Enel (OTCPK:ENLAY) subsidiary which has substantial nuclear exposure as well as resilient and rate-indexed remuneration schemes in its regulated utility business. Since it trades at a substantial discount and offers a high dividend yield, we see Endesa as an attractive income and price appreciation opportunity, although very binary in nature.


To look at the nuclear opportunity, we only have to look as far as the capacity factors and the low value on nuclear provisions provided by nuclear-heavy utilities like EDF (OTCPK:ECIFF). The capacity factors are unbelievable, and put any renewable energy source to shame. Moreover, the power of the atom doesn't require fickle environmental conditions to give us energy, although it does require robust protocol to help us avoid events more cataclysmic than natural disaster. As such, it is not very loved in the political sphere, because no one wants to risk an event like that, and the need to be politically correct as a politician will have you supporting the pipe dream of 100% renewable.

Meaningful renewable contribution to the grid is doable, like 30%, but not much more, again exemplified by the unreliability of renewable power sources, even hydro, in occasional extreme weather

This article was written by

Formerly Bocconi's Valkyrie Trading Society, seeks to provide a consistent and honest voice through this blog and our Marketplace Service, the Value Lab, with a focus on high conviction and obscure developed market ideas.

DISCLOSURE: All of our articles and communications, including on the Value Lab, are only opinions and should not be treated as investment advice. We are not investment advisors. Consult an investment professional and take care to do your own due diligence.

DISCLOSURE: Some of Valkyrie's former and/or current members also have contributed individually or through shared accounts on Seeking Alpha. Currently: Guney Kaya contributes on his own now, and members have contributed on Mare Evidence Lab.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ELEZF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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