An Update on Our Free HX Legacy Idea

A few weeks ago, we shared a free idea from our long-term INVESTING publication – HX Daily.

We rarely share free ideas as we want to keep them for our paying subscribers.

We plan to have one free long-term idea out there at any given moment, and we thought THIS idea was one of the best we had seen in several years.

For those of you who missed the previous report – the company is Talen Energy Corporation (OTC: TLNE).

We first recommended shares of this power product to our paid subscribers in mid-February. Then, we shared it with our free daily readers in mid-March.

Here is that note…

Our paid subscribers have made almost +40% on the stock, and free subscribers are up about +8% so far…

We also recently released a video discussing the idea with one of our subscribers. You can watch that here…

In that video, we update our analysis as there has been material news since we first recommended the shares.

In this issue of HX Daily, we will share those updates with our readers.

The big news that drove the stock higher was the announcement of a deal around their data center business.

The fundamental details are that they sold the data center they developed for over 2.5x what they paid to Amazon.com Inc. (NASDAQ: AMZN).

The company recently published a presentation about the transaction, click to access. 

Here is the slide highlighting the financial details of the transaction…

The return on investment is excellent, but the power agreement was the most exciting thing about the transaction. The company contracted to sell power to Amazon at $70 a Megawatt/hour.

Right now, power in that part of the country is selling for $45 a MwH.

We ran the numbers in our model and believe that every +$1 MwH adds approximately $15 million of EBITDA to the company's bottom line.

Here is the company's valuation today based on its existing financial guidance…

The stock trades at a little less than 10x EV/EBITDA at the current share price. This is the most commonly used metric for a situation like this one.

We show three scenarios in this analysis.

The first is if it were to trade at 12.5x EV/EBITDA, which would be a 17% discount to the leading company in the sector, Constellation Energy Corporation (NYSE: CEG).

We also looked at the multiple at which a similar company called Energy Harbor Corp. was recently sold to another competitor, Vistra Corp. (NYSE: VST). That deal happened at 11x EV/EBITDA, and the TLNE assets are better than those owned by that company.

Finally, we took the actual cost of building the nuclear asset back in the 1970s. That was over $8 billion. In inflation-adjusted dollars, it would be closer to $25 billion. We don't know exactly what it would cost today to build a plant like the one they own, but based on other plants built globally, we think it would be between these numbers. This is the "replacement" cost of the plant.

Looking at these numbers, you can see between 15% and 40% upside from the current levels.

We think, however, that the upside is much higher. We see a power crisis developing in the United States and think power prices could go much higher.

If they went to the $70 MwH that Amazon is paying for power, that would add another $375 million to EBITDA. 

We also think you will likely see even higher multiples for these scarce assets. Remember, CEG already trades at 15x EV/EBITDA.

Here is where the stock would trade, running those numbers through the model…

In this scenario, we see almost a +200% upside in the shares!

This analysis is admittedly optimistic, but we think it highlights the potential for the stock.

The truth, though, is that we don’t think that TLNE is likely to remain a public company much longer.

Now that they have emerged from bankruptcy and cleaned up the balance sheet, we think it is highly likely that one of their competitors will try to buy them out. This is what Vistra did with Energy Harbor.

One particular point to note is that Constellation owns a nuclear asset called Limerick, which is about 100 miles away, has the same design, and was built at the same time.

This means that they would have significant cost synergies in any transaction where they would acquire TLNE. So even if they initially paid a high multiple (15x), the eventual cost would be lower.

This is what we think happens.

We suspect that either Constellation or Vistra (or both) come to the table in the next twelve months to purchase the company. This means we might never see the almost $300 per share we get in our optimistic model above. Still, we believe that the price could easily be +50% to +100% from where the shares are currently trading.

Do you own shares in any of the nuclear power-producing companies? Tell us more in the comments section online (scroll to the bottom of the post).

As a result of our updated analysis, we are also updating our "buy up to" price. Our original recommendation for paid subscribers had a $75 price, and for free subscribers, we said we would buy shares up to $90 per share. The stock has blown through those levels.

Based on the new data and numbers, we would be comfortable buying the shares up to $120 per share. That would simply put it at the multiple where Energy Harbor was recently purchased.

One last point: We are seeing increasing attention paid to our thesis. Recently, both the Wall Street Journal and Barron's ran articles about the increasing demand for power driven by AI and the value of these assets.

Here are those articles…

We think this is the tip of the iceberg, and we will see more and more of these types of stories, which will further support demand for the shares!

Watch on Youtube as Enrique is joined by a reader to review our new FREE IDEA.

We give these out very rarely, don’t miss your chance to learn about this unknown stock that will power the AI revolution and could double from here!

Check out the idea and subscribe to HX Legacy for more ideas like these!