Nuclear Energy Was on Its Way Out. Now It’s a Reason for Goldman to Recommend Buying Constellation Energy.
Constellation is one of the largest carbon-free energy generators in the country, relying on a mix of hydro, wind, solar, and nuclear energy.
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Shares of Constellation Energy were trading higher Monday after Goldman Sachs initiated coverage of the energy company at a Buy.
“We view the company as a large cap, clean energy related, strong free cash flow and capital allocation story,” wrote analyst Michael Lapides in a Sunday evening research note. He set a $62 price target for the stock, implying a return of over 20% to its current price.
Constellation (ticker: CEG) is one of the largest carbon-free energy generators in the country, relying on a mix of hydro, wind, solar, and nuclear energy. The company is a spinoff of power company Exelon , beginning regular trading in early February.
Lapides believes Constellation is well-situated to reap benefits from the transition to clean energy, especially given that the company operates one of the largest nuclear fleets in the country. Already, Constellation receives about $1.8 billion in annual tax credits for its plants in New York, New Jersey, and Illinois, and it could receive more if more states or the federal government impose a tax credit. These subsidies comprise about 30% of Constellation’s total revenue in 2023, Lapides calculates.
The company could also benefit from higher natural-gas and oil prices, which have been soaring in recent weeks.
“Higher natural-gas prices are largely beneficial for CEG as it runs a mostly nuclear fleet and therefore benefits more from the uplift in power prices and does not see a meaningful impact on the cost side when natural-gas prices increase,” he wrote.
Constellation’s cost-cutting opportunities could continue well after gas prices normalize, the analyst added.
Lapides is also forecasting $1 billion to $2 billion of annual free cash flow generation, which will help the company pay down debt, fund stock buybacks, and boost dividends.
The analyst acknowledged a few risks to his bullish take. If gas prices fall, Constellation’s margins could take a hit. It is also uncertain whether the state-level nuclear subsidies will be renewed once they expire, or if the terms will change significantly, he added.
Of the 14 analysts covering the stock polled by FactSet , 10 rated it a Buy or Overweight, and four gave it a Hold.
Constellation shares were up 3.2% to $50.89 on Monday.
Write to Sabrina Escobar at [email protected]
