The
utilities
sector
is
living
in
the
shadows
of
mega-cap
tech,
but
a
power
player
name
is
emerging
—
and
it’s
toting
year-to-date
gains
of
more
than
40%.
Constellation
Energy
,
headquartered
in
Baltimore,
is
the
top
winner
in
the
utilities
sector
in
2024,
with
NRG
Energy
in
a
distant
second
place
with
a
22.7%
advance.
The
gains
come
at
a
time
when
high
interest
rates
continue
to
weigh
on
utilities,
raising
the
companies’
refinancing
costs
and
making
these
classic
dividend
payers
less
competitive
against
the
attractive
yields
investors
can
earn
on
Treasurys.
Indeed,
the
utilities
sector
and
real
estate
are
the
two
laggards
of
the
S
&
P
500
,
down
about
1%
and
3.5%
in
2024,
respectively.
CEG
XLU
1Y
line
Constellation
Energy
versus
the
Utilities
Select
Sector
SPDR
Fund
over
the
past
year
Constellation,
which
currently
has
a
dividend
yield
of
0.8%,
isn’t
your
father’s
utility.
Analysts
covering
the
name
are
largely
bullish
on
it,
with
about
62%
of
them
rating
it
a
buy
or
strong
buy,
per
LSEG.
But
their
price
targets
suggest
shares
could
slip
roughly
3%
from
here.
Constellation,
which
produces
energy
through
nuclear
power
plants,
along
with
hydro,
wind
and
solar,
is
a
green
energy
play
and
a
beneficiary
of
the
Inflation
Reduction
Act.
“We
see
CEG
as
a
differentiated
story
given
its
position
as
the
largest
producer
of
carbon-free
generation,
low
leverage
and
burgeoning
clean
product
strategy
that
will
enable
its
customers
to
accelerate
their
own
decarbonization
goals,
including
the
potential
for
large-scale
hydrogen
production,”
wrote
BMO
Capital
Markets
analyst
James
Thalacker
in
a
Feb.
28
report.
A
spinoff
stands
on
its
own
Constellation
is
the
result
of
a
2022
spinoff
from
utility
giant
Exelon
,
whose
smaller
utilities
include
Atlantic
City
Electric,
Baltimore
Gas
and
Electric
and
Delmarva
Power
&
Light.
The
spun-off
company
now
provides
10%
of
the
country’s
carbon-free
electricity
and
has
more
than
32,400
megawatts
of
capacity.
What
investors
love
about
it
—
and
what’s
driving
the
stock’s
price
appreciation
as
of
late
—
is
the
hefty
amounts
of
cash
that’s
being
returned
to
shareholders.
In
late
February,
Constellation
posted
its
fourth-quarter
results,
beating
analysts’
expectations
for
adjusted
earnings
before
interest,
taxes,
depreciation,
and
amortization.
But
the
real
newsmaker
was
the
company’s
forward
guidance:
Constellation
is
calling
for
adjusted
earnings
ranging
from
$7.23
to
$8.03
per
share
for
the
full
year,
compared
to
analysts’
forecasts
for
$6.51
per
share.
The
company
also
announced
a
plan
to
hike
its
per-share
dividends
by
25%,
exceeding
its
10%
annual
dividend
growth
target,
and
it
started
its
next
$1
billion
in
share
repurchases.
Just
last
year,
Constellation
completed
its
first
$1
billion
stock
repurchase
plan.
It’s
also
sitting
on
a
pile
of
cash.
The
company
has
about
$3.1
billion
to
$3.5
billion
of
unallocated
capital
over
the
next
two
years,
CFO
Daniel
Eggers
said
on
the
company’s
Feb.
27
earnings
call.
Data
center
drivers
The
prospects
are
looking
rosy
in
the
long
run,
with
Constellation
targeting
long-term
base
earnings
per
share
growth
of
at
least
10%
through
the
decade.
This
will
be
backstopped
by
the
nuclear
production
tax
credit
in
the
Inflation
Reduction
Act,
along
with
the
company’s
free
cash
flow
generation.
The
update
was
enough
to
spur
KeyBanc
analyst
Sophie
Karp
into
upgrading
shares
to
overweight
from
sector
weight
with
a
price
target
of
$190
per
share.
“CEG
has
laid
out
a
convincing
growth
algorithm,
underpinned
by
the
existing
policy
framework
and
trends,
which
we
think
offers
much
more
clarity,
and
solidly
positions
CEG
as
one
of
the
premium
infrastructure
names
in
our
coverage,”
she
wrote
in
a
Feb.
27
report.
There
are
other
drivers
lifting
shares
higher,
too.
BMO’s
Thalacker
pointed
to
potential
margin
expansion
opportunities
tied
to
data
center
demand
and
24/7
carbon-free
power.
So-called
24/7
carbon-free
power
involves
purchasing
electricity
generation
from
the
same
region
where
a
corporate
client
will
use
it.
This
matching
can
occur
on
an
hourly
basis.
Last
June,
Constellation
reached
an
agreement
with
Microsoft
to
power
one
of
the
tech
giant’s
data
centers
in
Virginia,
using
the
utility’s
hourly
carbon-free
energy
matching
platform.
Data
center
demand,
especially
as
artificial
intelligence
proliferates,
will
spur
a
greater
need
for
electricity
–
and
in
particular,
carbon-free
power
to
meet
environmental
policy
goals.
“Today,
it’s
not
uncommon
to
see
100-megawatt
data
centers,”
said
CEO
Joseph
Dominguez
on
the
company’s
latest
earnings
call.
“And
with
our
clients,
we’re
talking
about
data
centers
that
approach
1,000
megawatts,
and
they
require
24/7
power.”
And
the
Street
is
noticing
the
power
of
data
center
demand.
“CEG’s
outlook
has
further
upside,
particularly
from
higher
inflation,
higher
power
prices,
and
premium
pricing
for
clean/reliable
nuclear
through
24×7
product
and
data
centers
on
site,”
wrote
Steve
Fleishman
of
Wolfe
Research
on
Feb.
28.
He
rates
the
stock
as
outperform
and
has
a
price
target
of
$177.
“The
upside
is
meaningful,”
he
added.
“For
instance,
assuming
3%
vs
2%
inflation
raises
CEG’s
2028
revenue
by
$755M.”
Potential
legislative
risk
The
worry
that’s
on
the
mind
of
investors
in
companies
with
a
renewable
focus
is
whether
the
IRA,
along
with
the
nuclear
production
tax
credit,
could
be
threatened
in
the
2024
election.
Republican
lawmakers
have
opposed
the
legislation
and
have
threatened
to
repeal
it.
Analysts
think
that
while
it’s
a
possibility,
a
repeal
of
the
legislation
is
probably
unlikely.
“Republicans
would
have
to
gain
majorities
in
both
Congressional
chambers,
and
come
to
a
consensus
on
legislation,”
wrote
UBS
analyst
Ross
Fowler
in
a
March
4
report.
“The
expiration
of
the
[production
tax
credit]
in
2032
absent
renewal
also
makes
it
easier
to
include
in
any
budget
reconciliation
negotiations.”
