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Stock Strategist

This Stock Gets the Cold Shoulder From the Market

Its discount to peers neglects its steady cash flows and option value.

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 Calpine (CPN) is becoming a grandma stock. The market continues to ignore its consistent, growing free cash flow that management is dutifully returning to shareholders at a rate that exceeds grandmalike regulated utilities and pipeline partnerships. A competitively advantaged fleet, attractive markets, and management's smart capital allocation support continued cash flow generation and shareholder returns. Calpine offers investors an opportunity to pick up a consistent, cash-producing machine at a substantial discount to similar firms while offering the best upside and option value of any peer.

Calpine's reliable, growing free cash flow gets no love from the market. The stock trades at a 25% discount to our $28 fair value estimate and a significant discount to other utilities and pipeline operators. Based on our cash flow projections, Calpine currently trades at a 10 times price/cash flow multiple. This compares with much richer multiples for diversified and regulated utilities, independent power producers such as  NRG Energy (NRG), and pipeline master limited partnerships such as  Enterprise Products Partners (EPD) and  Magellan Midstream Partners (MMP).

Andrew Bischof does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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