Vistra's stock has quadrupled in a year. Here's why it's not too late to buy.

MW Vistra's stock has quadrupled in a year. Here's why it's not too late to buy.

By Tomi Kilgore

J.P. Morgan sees Vistra in the 'catbird seat' among U.S. independent power producers, followed by Talen Energy and Constellation Energy

To follow the Wall Street maxim of buying high and selling higher, J.P. Morgan analyst Jeremy Tonet has recommended that investors buy the stocks of three independent power producers - even though they have all already more than doubled this year.

"We see structural tailwinds, including manufacturing onshoring, broader electrification trends (transportation, heating and more), as well [as] data-center development underpinning a paradigm shift in power demand," Tonet wrote in a note to clients.

The "paradigm shift" may also refer to the new era of artificial intelligence, as running AI applications is many times more power-intensive than traditional technology applications. This shift has led a number of tech giants to seek new reliable sources of energy, namely through deals with nuclear power producers.

Read: Google becomes the latest tech giant to strike a nuclear-power deal for AI.

Also read: Nvidia's stock is no long the S&P 500's top gainer this year. Here's what is.

"[W]e see burgeoning hyperscaler demand growth focused on firm, carbon-free power, transforming nuclear power into a unique, scarce offering that will command a substantial premium," Tonet wrote.

The analyst initiated coverage of the shares of Vistra Corp. $(VST)$, Talen Energy Corp. $(TLN)$ and Constellation Energy Corp. $(CEG.UK)$, all with overweight ratings.

The company "in the catbird seat," as Tonet's top pick of the group, is Texas-based Vistra Corp. He set a price target for Vistra's stock at $178, which implies about 31% upside from current levels and makes Tonet the second-most bullish of the 15 analysts surveyed by FactSet who cover the company.

Tonet feels Vistra stands out given its "attractive" exposure to ERCOT, or the Electric Reliability Council of Texas, as well as its natural-gas generation and nuclear optionality.

Even as the stock has already rocketed 317% over the past 12 months - to make it the S&P 500 index's SPX best performer over that time - Tonet believes it has the mostattractive risk-versus-reward profile of the IPPs.

"While exact timing around nuclear contracting opportunities appears uncertain, we would not be surprised to see an announcement materialize over the next year, potentially a very positive catalyst for shares in our view," Tonet wrote.

He said Vistra carries "additional optionality" should demand emerge for long-term gas contracts, "which could gain focus as large power users, particularly data centers, race to secure power amid significant new load growth."

Tonet's second-favorite IPP is Texas-based Talen Energy. He set a $268 price target for the stock, which is around 50% above current levels and is the highest target of the 10 analysts - all bullish - who cover the company.

The stock has soared 244% over the past 12 months. Talen has a nuclear-power deal with Amazon.com Inc.'s $(AMZN)$ cloud business, AWS.

Don't miss: Amazon makes fresh nuclear bet. Is it good news for this year's hottest stocks?

Tonet said Talen's stock "packs a punch," as the company runs a "near-pure-play PJM generator model," with a "peaker-heavy gas fleet" that allows it to generate more stable earnings. (PJM refers to the power grid that coordinates electricity movement in 13 states and Washington, D.C., while "peaker" refers to peak-demand power plants that operate when demand is greatest.)

"With no retail business, unlike IPP peers, [Talen] offers the highest leverage to PJM pricing trends and upside in a higher demand-growth outlook," Tonet wrote.

Next is Constellation Energy, which Tonet called a "blue-chip pick." With a market capitalization of $88.3 billion, the Maryland-based company is the largest of the three IPPs, as Vistra's market cap is $46.6 billion and Talen's is $9.1 billion.

His price target for Constellation's stock was set at $342, implying about 21% upside from current levels. Tonet is the most bullish of the 20 analysts who cover the company.

The stock has soared 141% over the past 12 months, which makes it the third-best performer in the S&P 500 over that time. AI play Nvidia Corp.'s stock $(NVDA)$ is the second-best performer, with a 217% gain.

"Backed by nuclear PTCs [production tax credits] offering an increasing floor to power prices, while retaining price upside, [Constellation Energy] carries industry-leading growth visibility through the end of the decade," Tonet said.

Also read: Why nuclear power is a 'perfect fit' to meet AI and crypto's energy needs.

Coupled with a strong "investment-grade" balance sheet, Tonet believes the stock deserves a "substantial premium" valuation.

"[W]e anticipate nuclear contracting to drive a large portion of [the stock's] upside" as Constellation secures "long-term hyperscaler agreements at premium prices," Tonet wrote.

-Tomi Kilgore

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October 17, 2024 12:59 ET (16:59 GMT)

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