Utility companies have recently faced significant challenges due to soaring inflation and increasing interest rates, which have not only pressured profits but also led to customer dissatisfaction over rising rates. However, analysts believe that the long-term outlook for utility stocks remains optimistic. With the ongoing surge in electrical demand, partly driven by the rapid growth of artificial intelligence (AI) and the proliferation of electric vehicles (EVs), investors are encouraged to look closely at this sector.
According to Julien Dumoulin-Smith from Jefferies, the transformation within the utility sector, specifically regarding the need for energy-hungry data centers, presents a solid investment opportunity. He notes that projections indicate a consistent annual demand growth of about 2-4% until 2030, with data centers themselves expected to contribute significantly, increasing their share of total U.S. electricity demand from the current 2-3% to potentially 6-8%.
Dumoulin-Smith identified two utility stocks that are well-positioned to benefit from these favorable trends: Talen Energy (TLN) and Vistra Energy (VST). Both companies have received Strong Buy ratings from Wall Street, highlighting their potential for robust growth in the coming years.
The first stock, Talen Energy, is a key player in North America’s independent power generation landscape, boasting a diversified portfolio that includes nuclear, natural gas, oil, and coal facilities. Its Susquehanna nuclear power plant, one of the largest in the United States, anchors its operations. Talen is strategically positioned to meet the growing energy needs of data centers, making it a compelling choice for investors.
In its latest earnings report for the second quarter of 2024, Talen announced an impressive revenue of $489 million, showcasing a remarkable year-over-year increase of 62.5%. The company’s proactive strategies have enabled it to achieve $165 million in adjusted free cash flow during the first half of 2024, with its stock price skyrocketing by 160% year-to-date.
Analyst Dumoulin-Smith emphasizes Talen’s robust market position, stating that its focus on energy generation will play a crucial role in its ongoing success. He set a price target of $232 for TLN, indicating a potential upside of 38.5% over the next 12 months.
The second stock, Vistra Energy, is another major contender within the utility sector, generating approximately 41,000 megawatts of electricity – sufficient to supply power for around 20 million households. The company’s diverse energy mix includes natural gas, coal, nuclear, and solar, along with battery storage solutions. Vistra has established itself as a frontrunner in competitive power generation across all major U.S. markets.
For the second quarter of 2024, Vistra reported $3.85 billion in revenue, reflecting a 20% increase from the previous year despite missing analysts’ forecasts by $110 million. The company remains financially healthy with $3.85 billion in available liquidity, including $1.62 billion in cash and cash equivalents.
Dumoulin-Smith remains bullish on Vistra as well, noting its strong positioning to capitalize on the increasing demand for electricity and potential partnerships with data centers. He has assigned a buy rating to Vistra, with a price target of $99, suggesting an anticipated 11% gain within the next year.
In summary, both Talen Energy and Vistra Energy stand out as prime investment options for those looking to capitalize on the growing demand for energy, particularly driven by advancements in technology and the rising need for data centers. As the utility sector adapts to these changes, investors should closely monitor these companies for potential growth and profitability.