Constellation Energy Stock Jumps 8.4% on June 10

On June 10, 2024, Constellation Energy Corporation (NASDAQ: CEG) stock jumped $16.63, or 8.4%, making it one of the best performing U.S. stock on the day.  There was no specific news released regarding the giant power producer; instead, we believe the move was primarily a relief rally after the stock corrected by about 14% from Memorial Day through the stock market close on June 7.

CEG has very impressive fundamentals (see below) which investors have especially come to appreciate after the company in late February issued robust full-year 2024 EPS guidance of $7.23-$8.03, well ahead of analysts’ then-consensus estimate of $6.38.  In addition, management said it expected to realize average annual EPS growth of at least 10% through the end of the decade.  In the 3+ months since CEG issued this forecast, the stock is up more than 60%.

Company Description

CEG has the third largest electricity generation portfolio in the U.S., and it produces more carbon-free electricity than any other U.S. company.  CEG has 33,094 megawatts (MW) of generating resources, including 22,070 MW and 2,563 MW of nuclear and renewable capacity, respectively.

The Investment Case

Companies which supply lightning-fast chips to data centers and hyperscalers are not the only entities which stand to reap windfalls from AI’s inexorable growth in demand for around-the-clock power.  U.S. independent power producers (IPPs) like CEG, Vistra Corp. (NYSE: VST), and NRG Energy, Inc. (NYSE: NRG) also stand to benefit from data centers’ soaring demand for power.  (Hyperscalers such as AWS, Azure, and Google Cloud offer computing and storage services on a massive scale and rely on data centers as an integral element of their business.)

More specifically, U.S. data center electricity consumption will grow to 260 terawatt-hours (Twh) in 2026, up from 200 Twh in 2022, according to the International Energy Agency.  By 2026, datacenters will comprise 6% of total power demand in the U.S.  CEG CEO and President Joseph Dominguez recently underscored the power demand growth of data centers: “Today, it’s not uncommon to see 100-MW datacenters, and with our clients, we’re talking about datacenters that approach 1,000 MW.”  VST CEO James Burke echoes this sentiment: “We’re seeing [datacenter] customers approach us at a rate that we haven’t seen in my history with the industry.”

IPPs like CEG will be able to sign long-term power contracts to supply data centers at very attractive rates.  Importantly, signing such long-term contracts not only creates impressive cash flows for the generating assets, doing so likewise de-risks them.  Such opportunities have not been available for IPPs for many years, if ever.

Importantly, CEG’s nuclear generation facilities qualify for a generous nuclear production tax credit under the Inflation Reduction Act (IRA).  The value of this credit is at least $25 per megawatt-hour (Mwh), per the Nuclear Energy Institute.  To put the magnitude of that figure into perspective, the average electricity rate in the U.S. (which covers the costs of generation, transmission, and distribution) is about $160 per Mwh, according to energybot.com.

Finally, CEG is a shareholder friendly company.  Reflecting its free cash flow generation potential, the company repurchased nearly $489 million of its stock in 1Q 2024, up from $231 in 1Q 2023.  

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Jim McFadden

Author

Jim has worked as an equity analyst and portfolio manager on Wall Street for more than 25 years, first as Institutional Investor-ranked utilities analyst with Bear Stearns and Goldman Sachs, and then as a long-short portfolio manager with hedge funds such as Amaranth Advisors and the Bass Brothers. In addition, he headed JP Morgan’s North American equity proprietary trading desk. Jim hold...