Billionaire Buys Severely Undervalued Firm

As we were scouring through the holdings of Dan Loeb, who founded Third Point, one stock in particular jumped off the page, Vistra (NYSE:VST), a firm that has transformed from a regional utility service to becoming one of the largest competitive residential electricity providers in the United States.

What makes it so appealing is its valuation but there is a whole lot more behind the fence lines of this utility provider to like too, and it’s clear that the investment team overseeing Third Point’s $6+ billion assets have spotted these characteristics too.

Beyond The Financials, Why Buy Vistra?

In the energy sector, if you can implement smart ways to produce and store energy, the domino effects of the efficiency can be enormous.

In Vistra’s case, it has succeeded already in implementing cutting-edge battery storage systems that not only enhance efficiency and sustainability but also provide a competitive edge.

While the tech investments solve current market needs more efficiently, they also strategically position the firm to capitalize better on future industry trends. It’s this foresight that management possesses which shareholders have spotted as crucial to the firm’s growth and resilience long-term.

For example, the executive team has invested in solar energy and battery storage projects that not only diversify the company’s energy portfolio but also position it at the forefront of the industry that is increasingly searching for more sustainable energy sources.

The company’s focus on renewable energy sources is crucial to meeting ever-growing regulatory demands for cleaner energy. Failure to do so risks shareholders taking a view that the company is failing to adapt to regulatory shifts and becoming a legacy utility that will stagnate.

In the marketplace more generally Vistra has established competitive advantages thanks to its scale, diversified energy portfolio, and technological advancements. Even on key performance metrics, such as market share, profitability and growth, it shines brightly relative to its peers. For example, the compounded annual growth in revenues over the past half decade has averaged 20.4%.

So the business appears to be sound but what about the stock?

Is Vistra Stock Undervalued?

According to 10 analysts, Vistra stock is 5.8% undervalued to fair value at $42.30 per share. 

Warren Buffett has famously said that the real key to investing is identifying the present value of all the company’s cash flows from here to eternity and when that calculation is run, the upside looks a whole lot more compelling. Fair value, based on a DCF forecast analysis, is $65 per share, a full 63% higher than where the share price currently resides.

It seems that Dan Loeb and his investment team have spotted the disconnect between the current share price and the intrinsic net worth of the firm. But they are not alone because management has also identified a gap and taken action by engaging in a share buyback.

The Board of Directors authorized a share repurchase scheme of $4.25 billion, a material figure when considering that the market capitalization of the firm is $14.2 billion. 

It’s notable also that the company’s revenues are $15.5 billion, higher than the market cap at this time, meaning the price-to-sales ratio is just 0.9x.

Another multiple that looks particularly attractive at this time is the price-to-earnings figure of 11.1x. Indeed it’s only the price-to-book that appears materially elevated at 4.0x.

So if the numbers look so good, is there a drawback to be worried about?

Is Vistra Stock a Sell?

If there were a couple of reasons to be concerned about holding Vistra stock, stability and future revenues would rank as two of the top concerns.

In the past, the company’s income statement has oscillated from high profitability to losses with some regularity. And while the past 5 years has been a boon period with revenues rising tremendously and profits galore, the next five don’t leave as much hope for investors with the top line CAGR projected to go negative by 1.4%.

As a result, investors hoping to ride further upside must rely on the valuation argument and the dividend as a buffer against downturns. 

Speaking of which, Vistra’s dividend yield of 2.13% is reasonable but not stellar. However, it has been increasing consecutively with each passing year over the past half decade and the payout ratio of 31.66% leaves management with a lot of flexibility to keep hiking it in the coming years without encroaching on the balance sheet too much.

Is Vistra Stock a Buy?

Vistra has a lot of tailwinds at this time and it’s clear why the stock made the cut into the Third Point portfolio.

The company appears very undervalued at this time relative to its cash flows. If they can be sustained, and admittedly that is a big if based on past undulations in profitability, the upside potential is enormous for shareholders, even after the run up in VST share price.

The conviction that management has in buying the stock via a share repurchase scheme further cements the bullish thesis. 

Plus shareholders can take comfort knowing that, a slowdown in sales, should not materially affect earnings. In fact, net income is forecast to grow again this year.

With a strong cash flow yield, a history of profitability and a low earnings multiple, Vistra has the hallmarks of being a solid investment for conservative-minded investors looking for the comfort of a sustainable dividend in addition to an enticing valuation.

As the share price continues to march higher, it seems momentum is very much with the bulls at this time, so new investors can likely ride the coattails until the share price breaks below the key moving average lines.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.