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This Attractive Power Producer Is On Sale

Calpine's highly efficient fleet creates a cost advantage against its competition--and shares are trading well below our fair value estimate, says Morningstar's Andrew Bischof.

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Andrew Bischof: Utility valuations have once again heated up, with the sector trading at a 20% premium to our fair value estimates as of the beginning of July. While regulated utilities are expensive in our view, we think value can be had with riskier independent power producers.

Among independent power producers, we find Calpine the most attractively positioned, trading at a 25% discount to our $20 per share fair value estimate. While all independent power producers have no moat ratings, Calpine is the only independent power producer with a positive moat trend. Calpine is uniquely positioned among independent power producers as the industry's only predominant natural gas generator, with the most efficient fleet in the U.S. The company's plants are well positioned to benefit from tightening supply/demand conditions in key regions it operates, notably the Northeast and mid-Atlantic. Calpine's hedging program and capacity revenue lock in a substantial amount of future cash flows.

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