Updating Our HX Legacy FREE IDEA

Over my three decades on Wall Street as a professional investor, my job was focused on something other than writing for an audience. My job focused on MAKING MONEY for my investors and partners.

My firms did write lengthy and detailed investor letters to inform people about our activities with their money, but it was a small part of the job.

Over those decades, though, I did READ literally millions of words of research. On average, I read nearly several hundred pages of research daily.

Relatively early in my career, I realized that most research didn't focus on the conclusion but rather the data.

The job of the Wall Street analyst is to provide data. They are there to provide the details so that we—the professional investors—can draw our conclusions based on that data.

Far too often, though, they presented pages of immaterial data. It frequently feels like they are simply writing to justify their fees.

I began my career as a newsletter author half a decade ago. Now, my job IS to write for our audience.

One of the great things is that we don't have to focus on sharing every single piece of data. Instead, we can jump right to the conclusions.

In today's HX Daily issue, we will update you on our FREE IDEA: Talen Energy Corporation (NASDAQ: TLN).

We first presented this idea to our paid readers in February at $67.62 per share and again to our free HX Daily readers in March at $87 per share.

This means that our readers are sitting on gains of +153% and +96%, respectively, in a little more than six months.

We have provided consistent updates since we first published the idea in March. You can read the original report and those updates here…

• Original TLN Report

• TLN Update #1

• TLN Update #2

Since that first report, the company and stock have seen an incredible transformation.

It moved from an over-the-counter listed post-bankruptcy thinly traded stock with no coverage to a listed, liquid stock with nine analysts covering it from some of the biggest firms.

The company also rationalized its asset base and cleaned up its balance sheet. 

Over this time, we also saw the realization by many investors that our country is likely facing a POWER CRISIS. We have built too little new capacity and closed too much old capacity, and accelerating growth – now driven by AI and data centers – has put us in a dangerous position.

As the owner of an extensive portfolio of clean (nuclear) power not attached to any dedicated customers, TLN is uniquely positioned to take advantage of the increase in power prices. They have already done so with their data center deal with Amazon.

In the six months since we recommended the stock, it has gone from an unknown utility "special situation" to a well-known pure play on clean energy and AI growth. One that also has an outstanding balance sheet and highly visible growth. 

These are the reasons the stock is up as much as it is for our readers.

The big question now, though, is what happens from here?

Recently (September 5), the company held its first analyst day and shared a tremendous amount of information with investors. They also shared some long-term forecasts.

This led a host of brokerage analysts to initiate coverage of the stock. We have read over one hundred pages of detailed analysis on TLN in the last two weeks.

In this note, we will not share all those details, but we will share the conclusions.

We believe that TLN stock has an upside in the next 18 months to between $250 and $300 per share, which is +40% to +65% from current levels.

Here are the drivers in our view…

1. Earnings Growth and Upside

When we first wrote about the company, they did not provide public guidance on earnings and cash flow, and no analysts covered it. Now, both are available.

Here are estimates for TLN's cash flow—EBITDA and Free Cash Flow—over the next few years…

You can see here that we expect to see EBITDA double across the next few years and then level off in future years. Free cash flow will grow similarly.

Much of this growth is already locked in at this point. The recent capacity auction for reserve power in 2025/2026 in their geography (PJM) saw a huge increase in the realized prices.

Another auction for the 2026/2027 period is upcoming in December. We suspect we will see similar results, which could drive our numbers higher. Nothing has changed in the capacity or demand outlook to point to a materially different result.

We also think that (eventually) we could see more data center deals like the one they did with Amazon. The regulators still need to approve that deal, and we think that will happen in the next few months.

Even if the exact deal is not approved, a deal that addresses the issues will be approved. That will still be a great result.

Given TLN's relatively small size, they could do more Amazon-type deals. This could lead to more visibility and an upside to the earnings numbers.

Finally, our numbers assume some additional capacity entering the market and moderating demand growth. These are the "conservative" assumptions.

The history of power, though, says that we are more likely to see much more aggressive spikes higher before we see any of that happen. We don't have any of that factored into our numbers.

Earnings estimates for TLN have only been available for a short time, but they have been consistently revised upward. Here is that chart…

All of this brings us to our view that TLN will continue to grow and beat numbers. When this happens, the stock will move higher.

2. Capital Return

The idea of TLN engaging in material return of capital to shareholders was very much theoretical when we wrote our first report. Today it is VERY real.

The company has already returned almost $1 billion of capital to shareholders through share buybacks, and it is now in an excellent position to return much more.

Here is an analysis of how much stock they could buy back using their free cash flow and potential debt leverage…

There is a LOT of information on this chart, and it distills some relatively complex financial concepts.

We will soon release a new episode of the HX Podcast in which we discuss this in detail and explain each of these concepts.

For this note, we are going to jump to the conclusion…

Based on conservative earnings estimates, the companies targeted leverage and a reasonable increase in the share price—TLN could buy back HALF of its outstanding shares in the next four years.

There are many moving parts here, and the one that could change the most is the assumed share price we use in the analysis. 

If we are right with our price target, they will be able to buy back less stock. That is a high-class problem to have if you own the stock.

How does buying back HALF the shares impact the share price?

No one knows, but we do see that the stock is going higher—probably a LOT higher.

3. Acquisition

We made this case in our original report: We think it is highly likely that a larger company will purchase TLN in the next couple of years.

In theory, the company could have been acquired much cheaper in the last few years, either during the bankruptcy process or after it reemerged.

The reality is that most potential acquirers are publicly traded companies, and paradoxically, they prefer to buy "cleaner" assets. They would rather buy a restructured company with good operating momentum at double the price than take on the risk of the restructuring.

Several utility companies could be buyers, including Constellation Energy Corporation (NYSE: CEG) and Vistra Corp. (NASDAQ: VST). They could easily pay our price target of $250 to $300 and have it be accretive to both earnings and growth.

We also think there are new buyers.

Blackstone recently set up a $30 billion infrastructure fund. We think we could see large private equity buyers like them come in and buy the company.

We could also see one of the significant hyperscalers buy the asset.

It certainly would attract considerable regulatory attention, but why doesn't Amazon.com, Inc. (NASDAQ: AMZN) or Microsoft Corporation (NASDAQ: MSFT) buy the whole company?

One final idea: Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK/B). They have $280 billion of cash and are already large owners of utility assets.

We believe there is no shortage of potential buyers; they see the same value in the stock as we do.

4. What is it Worth?

Here is an updated version of the original valuation table we published, along with updated numbers…

While the upside is not the same as when we recommended the stock at $67 back in February, it is still substantial.

We also think this upside will likely be realized in the next year.

We don't know about you, but that kind of return in a year looks pretty good to us!