Constellation Energy: We Need Clean, Stable, Cheap Energy, And Nuclear Is The Future

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Nuclear energy leadership: CEG is the leading nuclear power operator in the US, providing efficient and stable clean energy production, which positions it well to meet growing demand from AI....

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Energy companies have recently been under the spotlight since AI, amongst many other things, has created a huge energy demand. We have recently covered Vistra, and we think Constellation Energy is an even better opportunity because of its nuclear portfolio. As an energy investor, nuclear trumps any other clean energy because of efficiency and stability. Therefore, we are giving it a strong buy. The future of CEG is heavily impacted by government policies and the commodity market From our analysis, Constellation's share price is correlated to the government subsidy to the company and also the commodity market. This is particularly the case since CEG only has 21 reactors which has significantly limited the company's ability to achieve economy of scale, making itself sensitive to input price and market subsidies. The cost of Uranium is the first major factor The sharp increase in the price of Uranium between 2020 and 2024 has affected CEG Nuclear power production costs. This, coupled with a lack of economy of scale, inefficient machines, and high maintenance costs, has made the company unsustainable. The graph below shows the inverse relationship between the rise of uranium prices and the EBIT margin. Data by YCharts Therefore, government subsidy saves CEG clean energy production The US government subsidy program aligned with clean energy production saved CEG's clean energy efficiency. The US government acknowledges that when a firm's gross revenues are below $43.75 per megawatt per hour, a subsidy will be provided to the company in order to make the business economically sustainable. This is called the Nuclear Production Tax Credit PTC through the Inflation Reduction Act. Consequently, as the leading nuclear operator in the US, CEG is qualified for subsidies. The company's efficient nuclear energy production follows CEG CEO Joe Dominguez's commitment to take the opportunity of carbon-free energy legislation to expand the life of the nuclear fleet beyond mid-century. CEG is the leading nuclear power operation Statista The production of low-priced electricity by CEG nuclear power plants qualifies CEG for government subsidies. CEG has the best nuclear energy-producing technology, making its production cost lower below $43.75 per megawatt hour. Currently, CEG is producing its electricity using nuclear power at $32.58 per megawatt-hour, which qualifies it for government subsidies. CEG stocks reaction to subsidies There was an expectation that CEG stocks would perform badly due to the high cost of nuclear power production as uranium prices started to skyrocket in 2022. However, the US government saved CEG using the Nuclear Production Tax Credit (PTC) subsidy. The subsidies came from the $390 billion Inflation Reduction Act of August 2022, leading to a sharp increase in CEG stocks. A short decline in CEG stock price between November 2022 and February 2023 from the delayed subsidies disbursement, after which CEG stocks gained from $50 to $100 per share. Increasing investor confidence. Data by YCharts CEG as part of the Hydrogen Hub award CEO Joe Dominguez announced CEG's intent to construct the world's largest nuclear-powered hydrogen facility within LaSalle Clean Energy Center in Illinois. The stocks are expected to gain when they receive a part of $1 billion from the Department of Energy (DOE) under the Infrastructure Investment and Jobs Act. CEG has clarified its plan of using the hub funding to build a hydrogen facility powered by nuclear energy at LaSalle for $900 million. The project aims to produce 33,450 tons of hydrogen every year. Hub funding has created confidence in buying CEG stocks pending massive demand for clean energy from AI Data centers for more profits. GenAI demand for efficient Nuclear Energy GenAI has improved computing power efficiency with the transition models from Hoper GPU to Blackwell GPU to decrease computing power costs used by the data centers by 50%. Tencent News The rise of data centers against slow, clean power production The rapid growth of data centers for GenAI is not yet matched with AI companies' demand for clean energy. It is forecasted that by 2027, AI data centers demand for clean energy will be at 430/748 terawatt-hours (TWh), equivalent to 2% to 4% of global energy demand. The GenAI demand for clean energy is expected to rise by 105% by 2027, while the global data center energy demand compound annual growth rate (CAGR) is expected to increase by 20%. For investors, the commitment put in by companies such as CEG creates an opportunity to invest today and grow the investment. The hub financing by CEG of $900 million is a key indicator of the growth of CEG shares in the next 4 to 6 months of 2024. The energy demand is expected to rise to 17 gigawatts (GW) by the end of 2024 and 36 GW by 2027. The demand for clean energy is expected to attract an investment of $95 billion. With a CEG investment of $900 million, it is well-positioned to meet most of GenAI's demand for clean energy. AI firms' willingness to pay more Power-generating companies face limitations such as limited power transmission lines, distribution projects, permitting new transmission, and chain bottleneck supply. On the other hand, GenAI companies are willing to pay more to ensure generating companies can finance these limitations. Gen AI companies have declared their willingness to pay a 101% premium on existing electricity prices for a 6-year economic life for their GPU. Tencent News An opportunity for CEG to take CEG has a total generation of nuclear energy at 13,293 MW, which is clean, stable, and cheap. This energy is produced within proximate locations such as LaSalle (Illinois), Calvert Cliffs (Maryland), and Limerick (Pennsylvania), among others. These strategic plants position CEG at an advantageous point in supplying clean energy to GenAI Data centers. CEG uses its best nuclear handling capacity to produce the most cost-effective electricity. CEG is expected to produce the most nuclear power capacity for all data centers, demanding an extra power of 24 gigawatts (GW). Valuation In Q1 2024 earnings announcement, Constellation Energy has beaten analyst's expectations in terms of earnings. The management has attributed this to the company's enhanced margins and improved efficiency. This is expected to continue. Therefore, the consensus earnings estimates are at $7.72 per share, which is a substantial increase from last year. Seeking Alpha In our opinion, Constellation Energy has the most potential amongst other independent power plants because of its focus on nuclear energy which is the most efficient (for example, the utilization of nuclear is as high as 90% while solar may merely be at 20% according to S&P). As such, we think that Constellation Energy can maintain a higher valuation multiple than its peers, at around 22x - 25x for the P/E ratio and 2.5x - 3x for the P/S ratio. Data by YCharts Consequently, this gives us a target price range of around $185 to $193, according to the analysis above. Investment risks  Market Risks: Market infrastructure significantly influences energy price volatility. Due to price fluctuations, stock prices and revenue change constantly. Regulatory risks: The Energy market has plenty of regulations, especially with the current renewable energy regulations. Companies like CEG getting into intensive renewable energy production face unforeseen government regulations that may impact their businesses. Numerous companies competing to get into the market to access government subsidies may drive energy revenues down due to the excess power supply in the future. Therefore, energy policies influence investors' potential and economic interests. Financial risks: High debt financing to renewable companies uses a considerable debt financing ratio. When the leverage is high, changing interest rates and high-interest payments influence the company's affairs. Energy companies consider debts secured using a high interest rate period; usually, two years are valuation, which impacts project valuation when the Fed cuts the interest rates.  Conclusion  Push factors for the company to grow are the AI demand as well as the energy market; Pull factors are the government's subsidy for clean and reliable energy and policies. With the company's stable growth, we are giving it a Strong Buy as a result.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.3","shortVersion":"4.26.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2454802484"}