NRG Energy, Inc. (NRG) is a utility and energy giant that sits at a potentially attractive longer-term entry point.
NRG stock tumbled in early December after it announced a deal to buy Vivint Smart Home, Inc. (VVNT) as it aims to expand its reach for the age of smart homes and high-tech energy grids. NRG's long-term goal is to become a "leading provider of essential services for homes and businesses."
NRG Energy is also a worthy consideration for 2023 given its dividend yield and stable, essential business model as the market could easily favor energy and utility stocks again amid all the unknowns.
Energy and Beyond
NRG is a utility powerhouse that generates electricity and provides energy solutions and natural gas to millions of business and residential customers. The Houston, Texas-based company is now poised to roll out more digital-focused efforts as electric grids, homes, and businesses grow more high-tech by the day.
NRG over the last year-plus explored how it could expand its reach to thrive in a world full of smart homes and connected energy grids. CEO Mauricio Gutierrez said on the company's Q3 earnings call in early November that NRG was growing increasingly focused on the rapid expansion of connected devices and appliances within the internet of things revolution.
NRG Energy decided it needed to capitalize on the growing smart home market and address a crucial drawback: too many different platforms and screens. "It is clear that a single interface for the home is of increasing importance and customer attitudes around these services are shifting from nice-to-have to need-to-have," Gutierrez said.
"Next, the electrification of the economy through smart technology and clean energy choices is real. We are seeing an increasing number of devices and appliances connected like HVAC, water heaters, battery, rooftop solar and other, in addition to having greater penetration of electric vehicles."
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Roughly a month later, NRG announced a big splash to help it expand almost overnight into much more than a utility firm. NRG Energy said on December 6 that it agreed to buy Vivint Smart Home, Inc. for $12 per share or $2.8 billion in an all-cash deal. NRG Energy sees the Vivint purchase, which it paid a 33% premium for compared to its closing price prior to the deal, as a fantastic way to establish itself as a "leading provider of essential home services."
The deal is projected to close at some point in the first quarter of 2023. The newly beefed-up and diversified NRG will boast a network of approximately 7.4 million customers across North America. NRG will likely incorporate Vivint's backend tech ecosystem across the firm.
The beefed-up firm will be able to bundle offerings for utilities, home security, automation, and more, with more people than ever craving high-tech, centralized minimalism for their homes. NRG is preparing for a world where homes and businesses seamlessly manage and optimize energy storage, electric vehicle charging, and beyond.
Other Fundamentals
Wall Street showed its displeasure with NRG for seemingly stepping out of its lane to buy a smart home company with offerings that include security, lighting, and beyond. NRG sees the acquisition as helping it prepare for a totally connected future as it brings in a company and its tech that already lives inside people's homes.
NRG remains confident in its planned acquisition for many reasons. The deal creates more stable and predictable earnings for NRG as it boosts its business beyond fluctuating energy prices, given Vivint's subscription-based model and long customer history.
NRG's post-Vivint announcement selloff has it trading around 33% below its highs at roughly $32 per share. NRG is also trading at a 60% discount to its industry at 6.4X forward earnings and 50% below its own 10-year median. The nearby chart shows that NRG is trading near its covid/all-time lows.
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The recent tumble has NRG shares neck-and-neck with its industry during the past five years, up 16%. Plus, NRG's Utility - Electric Power industry currently ranks in the top 30% of over 250 Zacks industries. NRG Energy's dividend currently yields 4.4% to crush its industry's 3.1%, with a very sustainable 23% payout ratio.
The company also plans to complete its $1 billion buyback program over the near term, of which $360 million was remaining as of November 30. NRG said it plans to use its excess free cash flow to fund the Vivint acquisition, as well as reduce acquisition-related debt, and maintain its common stock dividend growth policy in 2023. NRG then plans to return to its 50% return of capital / 50% growth capital allocation policy in 2024.
Bottom Line
Zacks estimates call for NRG's 2022 revenue to soar 20% to $32.34 billion to help lift its adjusted earnings by 45% to $11.12 per share. The top and bottom line strength is being driven, in part, by soaring energy and utility prices.
NRG is projected to see a rather significant pullback in 2023. Yet, its overall earnings outlook has trended largely upward for FY22 and FY23.
NRG's bottom-line positivity helps the stock land a Zacks Rank #1 (Strong Buy) right now, and it currently trades 19% below its average Zacks price target.
Overall, NRG offers investors value and dividends for what could be another turbulent 2023. Plus, NRG will soon be a much more diversified firm prepared to thrive in the world of connected smart homes and tech-centric energy grids.
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