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Blast Investor Real-time Plus by Henry Lu

Added NRG Sold HCA 6/17/2004

Real-time Trade Alert

Today I sold all HCA and baught NRG at $23.05
The reason for selling HCA is to get money for NRG.
NRG is relative large position among all stocks in my portfolio.
Energy sector is largest sector in my holding (NRG + CHK + WLL )
right now.

Current position: ADGO HRB CHK LIBHA NTES NRG NEN SOHU WLL

Research Report on NRG

NRG Target: $50 in 1-2 years.

NRG - Electric Power generation

NRG earning is improving fast. It should be able to generate EBITA
$750 million and free cashflow of $5 per share for 2004. Currently it
is trading at 50% discount to other electric power companies. NRG had insider
buying yesterday at $23.20.

Why invest into it?

It is extremely under-priced based on either absolute valuation trading at 5x expected 2004 free cashflow. By my calculation, NRG will get $5 per share free cashflow and $750 million EBITA in 2004.

Comparatively, other Electric utility companies are trading at 10-14x Enterprice Value/EBITA ratio. NRG this ratio is 7.
True PE=10 or 10 times its free cashflow, NRG is worth $50 per share.

NRG balance sheet has improved a lot. NRG just emerged from bancrupcy at end of 2003. Its old common shares was canceled. 5 Billion worth of debt was converted into 100 million of new common share at $24 per share. It will sell more asset to wind down more debt. There is no near-term maturity for its long term debt.
NBG lost $180 million in 2003 due to Connecticut contract. This money-losing contract expired at end of 2003. NBG will make money from now on in Connecticut.
NRG main business is northeast around New York, which had the big power blackout recently. The NRG power plant location is premium: close to huge demand and shortage of power transmission capacity.
The main cost is energy fuel. 70% of revenue came from Coal fuel, the rest are oil/N Gas. The electricity power industry is horrible that it loses money right now to generate electricity by using N Gas or oil. However, Coal fuel only cost 1/3 of oil/gas and profit margin is huge.
The spread of electricity and coal price is widening in general over past few years.

The eletricity price is following Natural gas price. Most of new electricity power plant is N Gas based.
New coal power plant is restricted by USA government due to enviremental reasons.
USA has largest coal reserve in the world so that coal supply is plenty. Coal price is volatile up or down. However, the spread of oil/gas/electricity and coal is widening in general over past few years.
China economy is booming and China is pushing up oil/N Gas price globally.
The coming inflation and devaluation of dollar will further push up oil/N Gas a lot more in the future.

Heavy insider buying between $21 to $23.

Conclusion:

NRG at $23 is very attractive value stock with strong earning/cash flow and improving business at true PE close to 5. Target: $50 in 1-2 years minimum trading at true PE = 10.