NRG Energy, Inc. is a wholesale power generation company, primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and internationally. The Company has a diverse portfolio of electric generation facilities in terms of geography, fuel type and dispatch levels. It seeks to maximize operating income through the efficient procurement and management of fuel supplies and maintenance services, and the sale of energy, capacity and ancillary services into attractive spot, intermediate and long-term markets.
At today’s close of $24.21 NRG shares are down significantly from their 2007 and 2008 highs of $47.20 and $45.80. Earnings can vary widely with competing energy pricing and the effects of hedging activities. There is not a clear view of what to expect. Here are the current EPS views (on continuing operations) for 2009 and 2010 from three different and respected sources…
Even at the low-end expectations NRG now trades for< 8.9x this year’s and under 11.7x next year’s earnings. If the high-end materializes the multiples would be 6.8x and 8.8x respectively.
Here are the more detailed per share numbers from continuing ops as reported by Value Line:
It is noteworthy that NRG shares changed hands as high as $29.70 - $47.20 in both 2006 and 2007 when earnings were well below both today’s trailing and next year’s expected EPS. Clearly there is big upside potential for buyers at the current quote.
Morningstar rates NRG at 4-stars (out of 5) and sees ‘fair value’ as $37.00 /share. Standard and Poors also assigns NRG 4-stars (out of 5) and carries a 12-month price target of $30 /share.
Here are two ways to play NRG using buy/writes for about 5 ½ and/or 24 ½ month time horizons.
On the June 18, 2010 expiration date…
If NRG rises to at least $25 (+ 3.3% from today’s price):
· The $25 calls will be exercised.
· Your shares will be sold for $25,000.
· The $25 puts will expire worthless.
· You will be left with no shares and $25,000 in cash.
· You will have no further option obligations.
That would be a best-case scenario net cash-on-cash profit of $5,940/$19,060 = 31.1% achieved in under six months on shares that only needed to rise by 3.3% or better.
What’s the downside?
If NRG remains below $25 on the June 18, 2010 expiration date:
· The $25 calls will expire worthless.
· The $25 puts will be exercised.
· You will be forced to buy another 1000 shares.
· You will need to lay out an additional $25,000 in cash.
· You will end up with 2000 NRG shares.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $2.15 /share call
premium = $22.06 /share.
On the ‘put’ shares it’s the $25 strike price less the $3.00 /share put premium
= $22.00 /share.
Your overall break-even would be $22.03 /share. NRG could fall by as much as $2.18 (or -9%) without causing a loss on this trade.
Unless you see NRG going down more than 9% by mid-June the risk/reward here looks very good.
Long-term traders consider this more aggressive buy/write combination…
If NRG goes up to $30 or higher (+ 24%) by the Jan. 2012 expiration date…
· The $30 calls will be exercised.
· You will sell your shares for $30,000.
· The $30 puts will expire worthless.
· You will be left with no shares and $30,000 in cash.
· You will have no further option obligations.
That would result in a best-case scenario net profit of $18,190/$11,810 = 154% cash-on-cash.
Not too bad for a minimum move of 24% over a 25.6 month holding period.
What’s the downside?
If NRG remains below $30 through the Jan. 2012 expiration date…
· The $30 calls will expire worthless.
· The $30 puts will be exercised.
· You will be forced to buy another 1000 NRG shares.
· You will need to lay out an additional $30,000 in cash.
· You will end up with 2000 NRG shares.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $3.70 /share
call premium = $20.51 /share.
On the ‘put’ shares it’s the $30 strike price less the $8.70 /share put premium = $21.30 /share.
Your overall break-even would be $20.91 /share or (-13.6%) below the trade inception price.
Summary: In this longer-term trade you have maximum upside of 154% on any move of + 24% or greater while you are protected against loss on any drop of less than 13.5%.
Disclosure: Author is long NRG shares and short NRG options.
At today’s close of $24.21 NRG shares are down significantly from their 2007 and 2008 highs of $47.20 and $45.80. Earnings can vary widely with competing energy pricing and the effects of hedging activities. There is not a clear view of what to expect. Here are the current EPS views (on continuing operations) for 2009 and 2010 from three different and respected sources…
2009 Estimate | 2010 Estimate | |
Value Line | $3.55 | $2.74 |
Yahoo Finance | $2.86 | $2.08 |
Zacks | $2.74 | $2.11 |
Even at the low-end expectations NRG now trades for< 8.9x this year’s and under 11.7x next year’s earnings. If the high-end materializes the multiples would be 6.8x and 8.8x respectively.
Here are the more detailed per share numbers from continuing ops as reported by Value Line:
Year | Sales | C/F | EPS | B/V | Avg. P/E | Range |
2004 | 13.56 | 2.13 | 0.81 | 13.05 | 15.4x | 9.00-18.10 |
2005 | 16.76 | 1.56 | 0.33 | 11.20 | NMF | 15.10-24.70 |
2006 | 22.98 | 4.49 | 1.82 | 19.35 | 13.4x | 20.90-29.70 |
2007 | 25.30 | 4.95 | 1.95 | 19.35 | 20.1x | 27.20-47.20 |
2008 | 29.38 | 6.87 | 3.66 | 26.56 | 9.4x | 14.40-45.80 |
It is noteworthy that NRG shares changed hands as high as $29.70 - $47.20 in both 2006 and 2007 when earnings were well below both today’s trailing and next year’s expected EPS. Clearly there is big upside potential for buyers at the current quote.
Morningstar rates NRG at 4-stars (out of 5) and sees ‘fair value’ as $37.00 /share. Standard and Poors also assigns NRG 4-stars (out of 5) and carries a 12-month price target of $30 /share.
Here are two ways to play NRG using buy/writes for about 5 ½ and/or 24 ½ month time horizons.
Cash Outlay | Cash Inflow | |
Buy 1000 shares NRG @$24.21 /sh. | $24,210 | |
Sell 10 June $25 calls @$2.15 /share | $2,150 | |
Sell 10 June $25 puts @$3.00 /share | $3,000 | |
Net Cash Out-of-Pocket | $19,060 |
On the June 18, 2010 expiration date…
If NRG rises to at least $25 (+ 3.3% from today’s price):
· The $25 calls will be exercised.
· Your shares will be sold for $25,000.
· The $25 puts will expire worthless.
· You will be left with no shares and $25,000 in cash.
· You will have no further option obligations.
That would be a best-case scenario net cash-on-cash profit of $5,940/$19,060 = 31.1% achieved in under six months on shares that only needed to rise by 3.3% or better.
What’s the downside?
If NRG remains below $25 on the June 18, 2010 expiration date:
· The $25 calls will expire worthless.
· The $25 puts will be exercised.
· You will be forced to buy another 1000 shares.
· You will need to lay out an additional $25,000 in cash.
· You will end up with 2000 NRG shares.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $2.15 /share call
premium = $22.06 /share.
On the ‘put’ shares it’s the $25 strike price less the $3.00 /share put premium
= $22.00 /share.
Your overall break-even would be $22.03 /share. NRG could fall by as much as $2.18 (or -9%) without causing a loss on this trade.
Unless you see NRG going down more than 9% by mid-June the risk/reward here looks very good.
Long-term traders consider this more aggressive buy/write combination…
Cash Outlay | Cash Inflow | |
Buy 1000 NRG @$24.21 /share | $24,210 | |
Sell 10 Jan. 2012 $30 calls @$3.70 /share | $3,700 | |
Sell 10 Jan. 2012 $30 puts @$8.70 /share | $8,700 | |
Net Cash Out-of-Pocket | $11,810 |
If NRG goes up to $30 or higher (+ 24%) by the Jan. 2012 expiration date…
· The $30 calls will be exercised.
· You will sell your shares for $30,000.
· The $30 puts will expire worthless.
· You will be left with no shares and $30,000 in cash.
· You will have no further option obligations.
That would result in a best-case scenario net profit of $18,190/$11,810 = 154% cash-on-cash.
Not too bad for a minimum move of 24% over a 25.6 month holding period.
What’s the downside?
If NRG remains below $30 through the Jan. 2012 expiration date…
· The $30 calls will expire worthless.
· The $30 puts will be exercised.
· You will be forced to buy another 1000 NRG shares.
· You will need to lay out an additional $30,000 in cash.
· You will end up with 2000 NRG shares.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $24.21 purchase price less the $3.70 /share
call premium = $20.51 /share.
On the ‘put’ shares it’s the $30 strike price less the $8.70 /share put premium = $21.30 /share.
Your overall break-even would be $20.91 /share or (-13.6%) below the trade inception price.
Summary: In this longer-term trade you have maximum upside of 154% on any move of + 24% or greater while you are protected against loss on any drop of less than 13.5%.
Disclosure: Author is long NRG shares and short NRG options.
