Wall Street loves Constellation Energy today. Should you?
Constellation Energy (CEG 3.94%) stock soared 4.9% through 1 p.m. ET Wednesday after Seaport Global Securities analyst Angie Storozynski upgraded shares of the electric utility company to buy.
Storozynski predicted Constellation stock, which costs less than $376 today, will hit $407 within 12 months — an 8% gain.
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Why Seaport loves Constellation stock
This shows how excited investors still are about the artificial intelligence (AI) revolution, that the prediction of a mere single-digit percentage gain sent Constellation stock flying today. As one of the nation’s biggest providers of electricity, and of electricity produced from nuclear energy in particular, Constellation is considered integral to the nuclear thesis these days.
And yet, while Storozynski acknowledges the nuclear angle, it’s not really central to her own reasons for liking Constellation stock.
“The Calpine merger should close within the next 30 days,” says Storozynski, growing earnings for Constellation at the same time as merger costs “largely” protect the merged company from paying “cash taxes.”
The analyst does acknowledge that Constellation stock costs more than its “closest peer,” Vistra Corp (VST 1.58%). But “given CEG’s size and its nuclear/gas earnings mix,” Storozynski thinks the stock’s worth paying a premium for.
Is Constellation Energy stock a buy?
I disagree.
Priced at more than 37 times trailing earnings pre-merger, most analysts agree Constellation’s unlikely to grow earnings much faster than 16% annually over the next five years. That’s a 2.3 PEG ratio, more than twice what you’d ordinarily want to see in a value stock. Moreover, Constellation only pays a miserly 0.4% dividend yield today, which makes it a pretty poor play as a dividend stock, too!
Might things change after the merger? Perhaps. I’ll check back in then, when and if it closes. For now, though, I fear Constellation stock’s still a sell for me.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy. The Motley Fool has a disclosure policy.
