Buy This, Not That: Is CEG a “Buy” Thanks to Microsoft?

Shah Gilani|October 9, 2024

Microsoft put the energy sector on notice with its blockbuster deal with Constellation Energy to revive the Three Mile Island nuclear plant.

Nuclear’s back, baby…

And Constellation’s stock soared once word got out.

But does the deal mean Constellation is a “buy”?

Or is there a better energy play out there for your money?

Get the details in my latest Buy This, Not That episode.

Click here or on the thumbnail below to dive in.

 

TRANSCRIPT

Hey, everybody. Shah Gilani coming to you with your weekly BTNT, as in Buy This, Not That.

Everybody’s all of a sudden talking about nuclear energy… and for good reason.

Microsoft (MSFT) just struck a deal with Constellation Energy (CEG) to buy all of the output of what will be a refurbished, reopened Three Mile Island nuclear facility.

That’s a big deal. So one of the companies we’re going to look at today is Constellation Energy.

The stock absolutely rocketed on the news. So I’m going to pull up the chart for you here while we talk about it. And trust me, this was indeed a rocket ride.

On September 19, the stock closed at $208.55. It gaps open the next day and closes the day up $45 or 22%. That’s a big gap for an energy company that is long way away from collecting any revenue and is close to starting to have to spend billions on refurbishing and reopening Three Mile Island. And the company’s already laden with some debt.

Constellation is probably the largest player in the arena. It’s got a market cap of $87 billion-plus. Annual revenue is $23 billion-plus. Profit margin is pretty decent at 10%.

But it’s got $9.12 billion in debt. What I don’t like about that is there’s only $311 million on the balance sheet in terms of cash.

Worse, operating cash flow is negative $5.6 billion over the last 12 months. That’s pretty ugly negative operating cash flow for a company that is going to have to borrow more, a lot more, to get the Three Mile Island facility back open.

The stock certainly is a winner. But it’s mostly a story that Microsoft is going to buy all of the output. That’s a beautiful story. But that’s not the end of the story.

The stock went even higher. It jumped 22% from the gap. And then it gets to a high, and that high from the gap was a 38% move. A 38% move on an energy stock a bit much. So I’m saying no… It’s Not a Buy.

You can see over here that the stock is also very, very overbought. I think it has a chance to fill this gap.

So as far as Constellation Energy goes, it’s Not a Buy here. It’s way too up there. It’s only down about 8% from its high point here. So it’s come back down.

If you want to buy the stock… look for it around $210. That might be worth it. I would not buy it up here. I think this stock has gone too far too fast.

So as far as Constellation energy goes, Not.

Lower? Yeah. But certainly not here.

The other big player in the sector that you guys asked me about is Vistra Energy (VST).

It’s a similar story on the chart without the gap.

Vistra Energy is a competitor of Constellation. It had a similar parabolic move without the gap… just a small gap here. But you can see by the chart, it’s a similar story. The stock wasn’t doing well. It was drifting lower just like Constellation was before the news came out regarding Constellation Energy and Microsoft.

Vistra obviously rode the coattails of that high. But just to compare apples to apples, Vistra rose 16%. Constellation popped 22%. From the day before the announcement that Microsoft was partnering up with Constellation to get that energy flow from the Three Mile Island plant… that was September 19… this stock was not doing so well, but it popped 15%, closer to 16%, while Constellation Energy popped 22%.

Constellation Energy went up 38% to its high, while Vistra went up 33%.

Vistra has already come down about 16% from that high. So it’s made more of a move down and partly because it’s not the play everyone thinks is Constellation.

Vistra is a smaller company in terms of market cap… $44 billion versus $87 billion for Constellation.

Obviously, smaller revenues too… $14 billion in revenue versus Constellation’s $23 billion. The profit margin is much smaller at 4.6% versus Constellation’s north of 10%.

But it’s got a better-looking cash flow model. It’s got a lot more debt at about $16.9 billion. That’s a lot of debt.

And Constellation is a bigger company with less debt. But Vistra has much better cash here at almost $1.7 billion in cash on the books and much better operating cash flow. The operating cash flow for Constellation is negative $5.6 billion on the trailing 12 months.

For Vistra, it’s positive at $3.95 billion. So that’s a big difference.

Now, I’m going to pick one because this is Buy This, Not That.

I would wait for both of them to come down… and then I would pick Vistra.

I think it’s going to have a smoother ride because I think Constellation will come down faster.

Vistra, when it comes back down, is going to be in a good position to go higher because of its operating cash flow situation.

If you want to buy Constellation, look for it at $210, $207. You’re not getting much of a dividend. It’s about 1.4%.

As far as Vistra, the forward dividend yield is 0.88%.

Don’t buy these for the dividend. As far as appreciation, it’s already happened. They’re going to come back down. Over the longer term, choose Vistra.

Frankly, I wouldn’t choose either one of them. That being said, nuclear is the place you want to be, but there are going to be better places to be.

We’ll talk about some better places in the future. But that’s your BTNT for today.

Buy Vistra, not Constellation Energy.

I think Constellation could be a buy down $210, $207, but don’t chase either of them up here.

I’ll catch you guys next week. Cheers.