Does NRG Energy (NYSE:NRG) Deserve A Spot On Your Watchlist?

By
Simply Wall St
Published
August 11, 2020

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. Unfortunately, high risk investments often have little probability of ever paying off, and many investors pay a price to learn their lesson.

In the age of tech-stock blue-sky investing, my choice may seem old fashioned; I still prefer profitable companies like NRG Energy (NYSE:NRG). While that doesn't make the shares worth buying at any price, you can't deny that successful capitalism requires profit, eventually. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.

View our latest analysis for NRG Energy

How Fast Is NRG Energy Growing Its Earnings Per Share?

In a capitalist society capital chases profits, and that means share prices tend rise with earnings per share (EPS). So like the hint of a smile on a face that I love, growing EPS generally makes me look twice. It is therefore awe-striking that NRG Energy's EPS went from US$1.61 to US$17.14 in just one year. When you see earnings grow that quickly, it often means good things ahead for the company.

I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While revenue is looking a bit flat, the good news is EBIT margins improved by 4.6 percentage points to 16%, in the last twelve months. That's something to smile about.

In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.

NYSE:NRG Earnings and Revenue History August 11th 2020

Fortunately, we've got access to analyst forecasts of NRG Energy's future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.

Are NRG Energy Insiders Aligned With All Shareholders?

We would not expect to see insiders owning a large percentage of a US$8.5b company like NRG Energy. But we do take comfort from the fact that they are investors in the company. With a whopping US$61m worth of shares as a group, insiders have plenty riding on the company's success. That's certainly enough to make me think that management will be very focussed on long term growth.

Is NRG Energy Worth Keeping An Eye On?

NRG Energy's earnings have taken off like any random crypto-currency did, back in 2017. That sort of growth is nothing short of eye-catching, and the large investment held by insiders certainly brightens my view of the company. The hope is, of course, that the strong growth marks a fundamental improvement in the business economics. So yes, on this short analysis I do think it's worth considering NRG Energy for a spot on your watchlist. You should always think about risks though. Case in point, we've spotted 4 warning signs for NRG Energy you should be aware of, and 2 of them don't sit too well with us.

You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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