On Monday, Morgan Stanley adjusted its outlook on Constellation Energy Corporation (NASDAQ:CEG), increasing the price target to $313 from $233 while maintaining an Overweight rating on the stock. This revision follows Constellation Energy's announcement on Friday that it will restart the Crane Clean Energy Center, an 835 MW nuclear plant formerly known as Three Mile Island, which had been decommissioned in 2019.
The restart of the nuclear facility is accompanied by a power purchase agreement with tech giant Microsoft (NASDAQ:MSFT), which has been analyzed by Morgan Stanley's research team. According to the firm's assessment, the deal with Microsoft is expected to contribute approximately $1.70 to Constellation's annual earnings per share, around $700 million in EBITDA, including tax credits, and about $450 million in free cash flow. The capital expenditure for this initiative is estimated to be in the range of $1 to $1.3 billion.
Morgan Stanley values the agreement with Microsoft at $19 per share and notes that Microsoft is paying roughly $100 per megawatt-hour (MWh) for the power, which is significantly above the current market levels of $45 to $55 MWh. This premium price suggests that future contracts for nuclear-generated power could be more lucrative than previously anticipated.
The positive impact of this deal is not limited to Constellation Energy alone. The analyst foresees a favorable outcome for other nuclear owners as well. Vistra Corp (NYSE:VST) and Public Service Enterprise Group Incorporated (NYSE:NYSE:PEG) have also seen their price targets raised. Vistra's target has been increased to $132 from $110, and PSEG's target has been adjusted to $95 from $83, reflecting the potential for higher nuclear contract prices and increased utility multiples compared to the previous month.
In other recent news, Constellation Energy has made notable strides in its business operations. The company recently announced the restart of Three Mile Island Unit 1, now rebranded as the Crane Clean Energy Center (CCEC). This move, coupled with a new 20-year power purchase agreement (PPA) with Microsoft, has significantly impacted Constellation Energy's market valuation, adding approximately $14 billion to its market capitalization.
Analysts have responded positively to these developments. Barclays, KeyBanc Capital Markets, Mizuho, and Wells Fargo have all increased their stock price targets for Constellation Energy. The company's recent second-quarter financial results, which included GAAP earnings of $2.58 per share and adjusted operating earnings of $1.68 per share, have also contributed to this optimistic outlook. Furthermore, Constellation Energy raised its full-year adjusted operating earnings guidance to a range of $7.60 to $8.40 per share.
The agreement with Microsoft is significant, marking Constellation Energy's largest deal of this type. It reinforces the company's position as a leading owner of unregulated nuclear generation in the United States and is expected to contribute substantially to the company's growth prospects. Analysts from Jefferies and Barclays, among others, have highlighted Constellation Energy's unique market position and potential for future growth.
InvestingPro Insights
In light of Morgan Stanley's updated outlook on Constellation Energy Corporation (NASDAQ:CEG), which now includes a higher price target and an Overweight rating, current InvestingPro data provides additional context. As of the last twelve months ending in Q2 2024, Constellation Energy boasts a substantial market capitalization of $79.73 billion, with a Price/Earnings (P/E) Ratio of 23.7. This valuation metric, however, stretches to a P/E Ratio of 30.96 when adjusted for the same period, indicating a premium on the company's earnings.
Despite a decline in revenue growth by -10.8% in the last twelve months, Constellation Energy has demonstrated impressive EBITDA growth of 92.28% during the same timeframe. This growth is a testament to the company's operational efficiency and could be a driving factor behind Morgan Stanley's optimistic view. Additionally, investors have been rewarded with a significant 1 Year Price Total Return of 132.82%, showcasing the stock's strong performance in the market.
InvestingPro Tips suggest that the company's dividend growth of 25.0% and a relatively modest dividend yield of 0.55% may appeal to investors seeking growth with a side of income. For those interested in further insights, InvestingPro offers additional tips on Constellation Energy and other companies in the sector.
It's worth noting that InvestingPro provides a Fair Value estimate of $185.98 for Constellation Energy, which contrasts with the analyst targets suggesting a fair value of $255. This disparity could indicate different perspectives on the company's future growth and profitability, which investors may want to consider. With 19 more InvestingPro Tips available, investors have ample resources at their disposal to delve deeper into Constellation Energy's financial health and market potential.
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