Source: Zhitong Finance
The artificial intelligence (AI) boom is not only fueling$NVIDIA (NVDA.US)$Wait for chip manufacturers, and the traditional utility industry has brought great surprises to investors. The reason is that the development and operation of AI consumes a lot of energy, which is where utility companies such as electric power companies come in. Although utility stocks may be difficult to attain the high valuations of tech giants, their investment value has been rediscovered as defensive stocks with high certainty and stable dividends. For investors, US electricity giants$Vistra Energy (VST.US)$It is one of the targets in this industry worth paying attention to.
1. AI and electric vehicles are important driving forces for electricity demand
The data shows that since the S&P 500 index hit a recent bottom on April 16, utility stocks have been rising, mainly electricity stocks$Utilities Select Sector SPDR Fund (XLU.US)$The increase was close to 15%, contributing to most of the ETF's gains so far this year. Among them, none has performed better than Vistra Energy, one of the largest electricity producers and retail energy providers in the US. The stock has accumulated a cumulative increase of more than 150% since this year, dwarfing Nvidia's nearly 110% increase since this year.
Ryan Levine, head of Citigroup's utilities business, said: “The AI narrative has attracted the deepest enthusiasm from investors. It is expected to be the utility industry's biggest driver.” Manju Naglapur, senior vice president and general manager of cloud, application and infrastructure solutions at information technology company Unisys, said, “The demand for electricity in data centers is already huge, but with the AI boom, demand has further soared. As large amounts of money pour into data centers, electricity consumption will increase dramatically.”
Citigroup analysts previously predicted that by 2030, the share of data center electricity demand could account for 10.9% of the US, a significant increase from the current 4.5%. If this expectation comes true, it will mean that more power plants, transmission lines, and other infrastructure will need to be built, and it will also bring more returns to utility companies.
In addition to the market trend of “the end of AI is electricity,” electric vehicles are also driving a significant increase in electricity demand. As electric vehicles continue to penetrate the US car market and affect electricity supply, the electricity consumption of electric vehicles in the US increased by more than 50% in the first two months of 2024 compared to the same period in 2023.
According to data from the US Energy Information Administration (EIA), as of February 2024, the total electricity consumption of electric vehicles was 1.58 million MWH, compared to 1.04 million MWh in the same period in 2023; the 52% growth rate also exceeded the 40% growth rate in the same period in 2023, which indicates that the impact of rapid growth in electric vehicle sales on the electricity market continues to increase.
More charging stations are planned across the US in 2024 and beyond, and electric vehicles with a battery range of 300 miles or more are becoming more common in manufacturers' products, which will drive greater demand for electricity at home and public charging ports.
It is worth mentioning that on May 14, the US Federal Energy Regulatory Commission (FERC) finalized regulations aimed at speeding up the construction of future power grids and approved the largest grid reform in at least 10 years. The new regulations aim to speed up the construction of future power grids to meet growing energy demand, particularly the surge in energy demand due to the development of AI and other technologies, and improve the grid's resilience to extreme weather events.
This means that the development of power grids is no longer just a short-term one, but from a long-term perspective to ensure that the grid can adapt to the energy needs and technological changes of the next few decades. As a result, for Vistra Energy, these benefits will boost performance and are expected to drive the company's stock price higher.
2. Performance growth is expected to accelerate, and valuations are relatively moderate
In 2023, Vistra Energy's GAAP net profit was US$1.5 billion, while net loss in 2022 was US$1.2 billion; profit before interest, tax, depreciation and amortization (EBITDA) after adjustments from continuing operations in 2023 was US$4.1 billion, and in 2022, this figure was US$3.1 billion.
Notably, Vistra Energy bought back 98% of the interest collected under the Tax Receivable Agreement (TRA). This simplified the company's capital structure and increased free cash flow for the next few years. Furthermore, Vistra Energy is expected to perform well for the full year of 2024, and the adjusted EBITDA for continuing operations is expected to be 3.7 billion to 4.1 billion US dollars. In February of this year, the company's board of directors approved a $1.5 billion share repurchase plan, which is expected to total repurchases of $2.25 billion in 2024 and 2025.
Vistra Energy also predicts that by 2026, the adjusted EBITDA of the company's continuing operations may exceed US$6 billion, which is about 24% higher than the previous expectations of market institutions. This means that the company's compound annual growth rate for this indicator will reach 13% during the 2023-2026 period, which is a significant increase from 3.8% in the 2020-2023 period.
Furthermore, according to Wall Street agency estimates, Vistra Energy's average EPS growth rate during the 2023-2026 period will be 33%. The stock's current 2026 price-earnings ratio is 17 times, and is still at a relatively moderate level. Vistra Energy's book value is only $8.06 per share, which is still far below market value, indicating that investors are optimistic about the stock.
3. Excellent capital allocation; expansion of nuclear power capacity is expected to benefit
In 2023, Vistra Energy's natural gas, nuclear, and coal-fired power generation accounts for more than 20% of total electricity consumption in Texas. Unlike regulated utility companies whose profits are determined by capital investments, Vistra Energy operates in an unregulated market and generates and sells electricity at market prices.
Historically, Vistra Energy's valuations have been heavily discounted compared to regulated utility companies and the overall market, partly due to challenges to the fundamentals of commercial electricity — stagnant demand for electricity in the US and an oversupply of natural gas. Meanwhile, significant growth in subsidized renewable energy generation has caused significant intraday price fluctuations in Vistra Energy's core market.
Faced with a challenging environment, Vistra Energy's capital allocation was excellent. The company shut down unprofitable coal-fired power plants to improve its carbon footprint and mitigate oversupply. Considering that the market's valuation of the company's remaining natural gas assets is insignificant compared to the cost of new construction projects, the company's management patiently invested in maintaining existing projects and used the excess cash flow for share buybacks. From 2018 to 2023, the number of its shares decreased by 33%.
On March 1, 2024, Vistra Energy announced the completion of the acquisition of Energy Harbor's nuclear power assets. This is a smart capital allocation move because the advantages of nuclear energy as the only carbon-free energy that generates electricity around the clock have finally been recognized, and the demand for zero-carbon emissions and basic load electricity has continued to increase in the US for existing and new nuclear power generation capacity. The deal provides a 4,000 megawatt increase in Vistra Energy's existing 2,400 megawatt nuclear power installed capacity, meaning 15.6% of the company's power generation will come from nuclear power. The deal also added 1 million retail customers to Vistra Energy's current 4 million customers.
As a rapidly growing data center hub, forward electricity prices have risen in places such as Texas and the Mid-Atlantic region, reflecting the tightening of power grids in the future. Vistra Energy's natural gas, coal and nuclear power business is mainly concentrated in these regions. On the May earnings call, Vistra Energy said that the 2026 all-weather forward electricity price in northern Texas has risen about 13% since November last year.
Vistra Energy's main business is concentrated in regions with strong economic growth, and many of the company's natural gas power plants are close to high-yield, low-cost gas fields. The company is also working to extend the useful life of its existing nuclear facilities. The new nuclear power generation capacity provides good basic load capacity, particularly for other clean energy sources such as renewable energy with intermittent characteristics.
With carbon neutrality targets set, US tech giants are currently focusing on nuclear energy, and are anchoring the supply of this clean energy by signing power purchase agreements (PPAs), building small modular reactors (SMR), and investing in nuclear power companies. As a result, Vistra Energy, which is in an advantageous position in the electricity market where demand is growing rapidly and is focusing on expanding nuclear power generation capacity, is expected to benefit.
IV. Risks
The moderate cost of interest on Vistra Energy's existing debt is a positive factor. However, it is worth noting that as of December 31, 2023, Vistra Energy's balance ratio was as high as 84%. Total commodity and other derivatives liabilities were $6.9 billion, total asset disposal obligations were $2.5 billion, and total long-term debt was $14.4 billion. Additionally, the company's extended debt will face higher costs. Due to the company's high debt ratio, it is particularly vulnerable to continued high interest rates. Therefore, this is a risk factor for investors to consider.
Currently, Wall Street analysts rate Vistra Energy on average as “buy” (a total of 12 analysts gave ratings, 7 of which rated “strong buy”), and the average target price is $96.37 (the highest target price is $133).
editor/tolk