Back to top

Analyst Blog

NRG Energy Inc. (NRG - Analyst Report) is set to report its fourth-quarter 2012 results on Feb 27. Last quarter, the company reported a 52.83% negative surprise. Let’s see how things are shaping up prior to this release.

Factors to Consider This Quarter

We believe the combined negative impact from fuel price volatility, stringent regulatory compliances and over-reliance on weather conditions may challenge the near-term results of the company.

Performance of the utility providers primarily depends on weather patterns of the region. Periods of volatile weather conditions not only affect demand, but can cause interruptions in coal production and transportation, especially in harsh conditions. Such situations increase operating expenses of the utility providers, and NRG Energy is no exception.

In addition, NRG Energy relies heavily on other parties for the wholesale transmission of power. Lack of modernization in transmission infrastructure and transmission price regulations could restrict the company’s transmission capacity. This will in turn hamper customer services thus adding to costs.

However, NRG Energy recently completed numerous inorganic and organic growth projects, including the acquisition of GenOn, and started operations at the newly installed Alpine Generating Station along with signing a 20-year electricity sale agreement with PG&E Corporation (PCG - Analyst Report). These projects will likely help the company to meet the growing demand from California and Arizona.

Earnings Whispers?

Our proven model does not conclusively show that NRG Energy is likely to beat earnings this quarter. That is because a stock needs to have both a positive Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank of #1, 2 or 3 for this to happen. This is not the case here as you will see below.

Zacks ESP: The earnings ESP is 0.0%. This is because the Most Accurate estimate as well as the Zacks Consensus Estimate stands at a loss of 29 cents.

Zacks Rank #3 (Hold): NRG Energy with Zacks Rank #3 (Hold), enhances the possibility of an earnings surprise. However, the Zacks Rank #3 when combined with a 0.0% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #4 and 5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

NRG Energy is not the only organization looking up this earnings season. We also expect other utility providers to beat earnings:

Ormat Technologies Inc. (ORA - Snapshot Report), earnings ESP of +50.00% and Zacks Rank #2 (Buy).

Berry Petroleum Company , earnings ESP of +4.05% and Zacks Rank #3 (Hold).

Please login to Zacks.com or register to post a comment.