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Jonathan Poland
Jonathan Poland
Articles (456)  | Author's Website |

Vistra Energy Is a Super Investor Lovefest

Billionaire gurus are piling into the stock

August 31, 2018 | About:

Vistra Energy Corp. (NYSE:VST) is an integrated power company based in Texas. In April, the company completed a merger with Dynegy to create one of the lowest-cost power providers in the United States. The combined company has a fleet of natural gas-centric power plants with approximately 41,000 megawatts of capacity, serving 2.7 million residential customers.

In June, the company guided for 2018 earnings before interest, taxes, depreciation and amortization of $2.78 billion to $2.98 billion and 2019 EBITA of $3.2 billion to $3.5 billion, with annual cash flow reaching north of $2.35 billion by 2020. It also announced a $500 million share buyback, which at current prices would take almost 5% of the float off the board.

The company has retired three coal-fired power plants and two coal mines. These units were projected to become money losers due to an increasing supply of natural gas, but it’s also good for publicity. More importantly, the company is venturing into utility-scale solar power generation with a new solar plant in West Texas that came online in June. This plant has 718,000 panels and only generates 180 megawatts of capacity, but it is Texas’ largest solar facility. It is also continuing to invest in energy storage as batteries improve to help solve the intermittency problem with solar power.

Utility companies will need to turn to new technology for future growth and cost reduction as the market for energy consumption becomes more competitive. If a company like Tesla (NASDAQ:TSLA) successfully commercializes a closed system for home use, utility companies will need to pivot into an energy router network rather than energy provider. This could be some decades away or it could happen next year, that’s the beauty of technology.

Impressive guru roster

Howard Marks (Trades, Portfolio)' Oaktree Capital Management owns 44,553,037 shares, representing 8.59% of the outstanding shares, joining John Paulson (Trades, Portfolio) with 3,698,400 shares, Jim Simons (Trades, Portfolio)' Renaissance Technologies with 2,026,073 shares, David Tepper (Trades, Portfolio) with 1,870,951 shares and Bruce Berkowitz (Trades, Portfolio) with 1,037,500 shares. Oaktree is betting big on Vistra, tying up 27% of its $3.9 billion portfolio in the stock.

Long term, the company will need to reinvest in renewables, but since it doesn't need to actually develop the technology, Vistra can wait until its economical to transition. Investors should also expect a dividend from the company soon, but at what rate is anyone's guess.

Price appreciation by 2020

Vistra has an enterprise value of $23 billion, which includes over $11 billion total debt. The company is a cash flow beast, which could have at least $6 billion by 2022 to use for dividends, growth and buybacks. Earnings are forecasted to be $1.85 per share in 2019, which would put the stock in the $37 range with current industry price multiples for Southern (NYSE:SO), Duke (NYSE:DUK) and Dominion (NYSE:D) all trading above 20 times earnings. That's a 55% increase on today’s price.

Disclosure: I am not long or short VST. 

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

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