Markets seemed to accept that the Fed’s supersized rate cut last week was because the central bank wanted to keep the job market healthy. U.S. markets traded mixed Friday. The $DJIA(.DJI)$ rose to touch a new high, but the $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ dropped. The best-performing concepts is Independent Power Producers & Energy Traders.
Considering the different perceptions of the stock, this time TigerPicks chose $Vistra Energy Corp.(VST)$ to have a fundamental highlight to help users understand it better.
$Vistra Energy Corp.(VST)$
Vistra sells electricity on a wholesale and retail basis "primarily in markets throughout the U.S." The company, which closed on the acquisition of four nuclear plants in March, is benefitting from increasing demand for electricity in general and is likely to benefit from high interest in nuclear energy in particular.
Also, importantly, Vistra is growing rapidly and has a very low valuation, while Wall Street appears to be growing more enthusiastic about VST stock. Finally, the firm is likely to benefit from interest rate cuts.
Ramping Electricity and Strong Interest in Nuclear Power
Consulting firm ICF recently estimated that U.S. electricity demand, after staying largely unchanged for the past two decades, would jump 9% "by 2028." And the firm predicts that average U.S. electricity prices would surge by an average of almost 20% between 2025 and 2028. Among the powerful catalysts likely to propel these trends are the electrification of transportation and the increased generation of hydrogen using electricity.
Since Vistra's business consists of generating and selling electricity, the company is well-positioned to benefit significantly from these trends.
Also, importantly, interest among regulators in nuclear power appears to be growing, and Vistra looks well-positioned to benefit from the latter trend. That's because, in March, the company closed on the acquisition of four nuclear plants that generate a combined total of 6,400 megawatts or 6.4 gigawatts. The latter amount is sufficient to power 3.2 million homes, Vistra reported.
In the tech sector, $Oracle(ORCL)$ is developing a data center that it intends to power with "three small modular nuclear reactors," whil $Amazon.com(AMZN)$ is looking to buy power from a nuclear plant located near a data center that it bought in March.
With data centers poised to generate 35 gigawatts of power between now and 2030, according to S&P Global, and tech giants looking ready to turn to nuclear to help power these facilities, Vistra is well-positioned to get a big boost from the proliferation of data centers. Indeed, S&P named Vistra as one of three nuclear plant operators that will benefit from these trends.
Meanwhile, in July, Congress passed and President Joe Biden signed legislation that is expected to reduce the time needed for companies to obtain licenses to build new nuclear plants. In June, the Department of Energy announced that it would spend $900 million "to support the deployment of light-water small modular reactors." Also in June, Energy Secretary Jennifer Granholm disclosed that America may reopen some of its shuttered nuclear plants.
With Washington looking united in favor of nuclear power, Vistra's nuclear plants are probably going to get significant backing on the regulatory and tax fronts from the federal government.
Valuation and Wall Street's Backing
The forward price-to-earnings ratio of Vistra's shares, excluding certain items, is 16.3 times, slightly below the sector average of 17.67 times. Moreover, its forward Enterprise Value/EBITDA ratio of 9.95 times is significantly lower than the sector average of 11.26 times.
But Vistra's valuation is exceptionally low in light of its strong, recent growth and its powerful growth outlook. Last quarter, for example, the adjusted EBITDA of the company's continuing operations surged 40% versus the same period a year earlier to $1.4 billion. Analysts, on average, expect the firm's earnings per share to soar from $5.25 in 2024 to $9.36 in 2026.
Meanwhile, as of Sept. 16, the shares had soared an incredible 158% in the last year, 124% in the last nine months, and 40% in the last six months, indicating that the Street has become quite enamored with the firm. Also indicating that the Street is behind the firm is the fact that 11 of the 12 Street analysts who have covered the stock in the last 90 days rate it as either a "buy" or a "strong buy." One analyst rates it as a "strong sell."
With interest rates dropping and Vistra offering a 1% dividend yield, investors are likely to become more interested in the name. That's because, given the company's large, expected earnings gain, the firm to raise its payout significantly going forward. And the demand for dividend stocks tends to rise as rates fall.
Growth May Appear Conservative
Texas operates the largest deregulated electricity market in the United States, which has been in place since 2002 when the state modified their energy regulatory strategy.
Texas’ change in regulatory measures means that ERCOT utilities like Vistra benefit from a distinctly unique market structure that allows them to sell electricity directly to Texas-based consumers without the normal oversight or restrictions typically found in regulated markets. Vistra has the flexibility to set competitive rates, innovate in their energy offerings, and capitalize on market demand fluctuations, especially as Texas continues to see rising electricity needs driven by AI data centers and other high-energy industries.
Operating in an unregulated market like Texas allows them to respond quickly to market dynamics, such as spikes in demand or changes in energy prices. An unregulated market means Vistra is offered the opportunity to maximize revenue during periods of high demand, particularly in extreme weather conditions when electricity prices can soar. In the absence of price caps, Vistra fully captures the benefits of price spikes, unlike in regulated markets where rates are often constrained by government policies. The summation of this is that higher demand from the grid results in exponentially higher earnings results. It's hard to forecast this. Analysts often lean on the conservative side as a result.
On this same note, I would also like to emphasize that Vistra is currently tracked by only a small group of analysts, with estimates from just three or four of them guiding market expectations a few years out. When fewer analysts are covering a stock, the range of opinions and forecasts tends to be narrower, which in my experience has led to less aggressive price targets and earnings estimates.
With this, the Texas energy grid is also increasingly facing immense strain due to rising demand brought by the state’s booming population and energy-intensive sectors like data centers and AI technology. As Texas is the only state in the continental U.S. with its own electric grid, it operates in a deregulated environment where electricity prices are highly responsive to fluctuations in supply and demand.
As Texas continues to attract more businesses and residents, the consistent pressure on the grid suggests that demand—and therefore prices—will likely remain elevated, which Vistra can take advantage of to maximize their revenue.
Risks and the Bottom Line on Vistra Stock
The expansion of data centers and battery-powered vehicles could greatly decelerate going forward, causing the demand for electricity to be meaningfully lower than expected going forward.
In that scenario, Vistra's top and bottom lines would probably not grow nearly as quickly as many expect at this point. Further, a deadly accident involving nuclear power could reduce the demand for such power, significantly undermining Vistra's nuclear power business.
Unlike a tech or consumer discretionary firm, Vistra's profits probably will never soar exponentially, given the highly commoditized nature of electricity. Consequently, the shares are viewed as best suited for value investors or income investors.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 6 Wall Street analysts offering 12 month price targets for Vistra Energy in the last 3 months. The average price target is $108.17 with a high forecast of $121.00 and a low forecast of $82.00. The average price target represents a 25.50% change from the last price of $86.19.
Resource:
https://seekingalpha.com/article/4721583-cheap-vistra-stock-is-poised-to-exploit-multiple-strong-trends
https://seekingalpha.com/article/4715463-vistra-tech-level-growth-for-a-utility
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