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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (235)  | Author's Website |

Fairholme Buys Vistra

Vistra and Dyegy are merging and planning on cutting costs

May 04, 2018 | About:

Energy utility Vistra (VST) recently merged with Dynegy (DYN). Synergies between the two are expected to increase cash flows. Management plans to pay down debt and reinstate the dividend in the future. Famed value fund Fairholme (FAIRX) recently bought shares.

The stock trades for $23.01, there are 523 million shares, and the market cap is $12.034 billion. Diluted earnings per share was a loss of 59 cents. The stock does not pay a dividend.

Sales were $5.978 billion in 2014, $5.37 billion in 2015, $5.64 billion in 2016, and $5.43 billion in 2017. Free cash flow was $665 million and the free cash flow yield was 5.5%. That is not bad. Management lists an adjusted free cash flow of $831 million but I’m going by stated numbers. Last year was the first time in several years that free cash flow was positive.

The balance sheet shows $1.487 billion in cash and $582 million in receivables. The liability side shows $473 million in payables and $8.81 billion in debt. That is not bad considering the stability of customer payments and free cash flow.

Vistra is a combination of Texas Utilities, Dyegy, Luminant, and Homefield. The company produces 41 gigawatts of power, enough to power 32 million homes. That’s a lot. It operates in Texas, Illinois, and the Northeast. According to Credit Suisse, the combined company will produce 65% of its power through natural gas.

Management has put up guidance for 2018 of earnings before interest taxes, depreciation and amortization of $1.3 billion to $1.45 billion. Free cash flow guidance of $600 million to $750 million, which includes expenses at its Comanche Peak location. If Vistra pulls off that free cash flow number, that’s pretty decent. Vistra has retired its Monticello, Sandow and Big Brown plants and related mines. The company retired 4.2 gigawatts of old coal plants last year. The company cut 300 jobs after the merger with Dynegy.

Management has discussed paying a dividend in the future but wants to pay down debt. As it has emerged from bankruptcy, the rating agencies are a little leery. There are also energy hedges in place. Credit Suisse stated that 90% of its natural gas is hedged in 2018 and 22% in 2019. Dynegy has a net operating loss that can be used in the future to save in taxes.

In an interview with Jim Cramer on CNBC, CEO Curtis Morgan stated that coal is on its way out. Cramer asked if coal was going to have a renaissance or was it going to be a bleed-off (I like that term). Morgan stated that solar, wind, and batteries are becoming cost competitive.

The Fairholme Fund bought shares in its flagship fund and several other funds. I’d be interested to hear what Bruce Berkowitz (Trades, Portfolio) has to say about the stock. The company is going to release earnings May 4.

Let me tell you what I like about Vistra. It’s not very well covered for one thing. That’s going to change. I see that Morgan Stanley and Morningstar have no analyst. The only good report that I found was from Credit Suisse. A company this large will pick up coverage. Of course, everyone is going to fall in love with this utility when it issues a dividend. Many mutual funds can’t buy a stock unless it pays a dividend. That should push up shares in the future. The continued cost savings between Dynegy and Vistra should improve free cash flow, which can be used to pay down debt and issue dividends.

I can see why the Fairholme Fund (Trades, Portfolio) purchased shares. The stock has been on an upward trajectory for a long time and seems to be continuing on that path. It seems that management has an eye for creating value from the merger and passing it onto shareholders.

We own shares of Fairholme.

About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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