As the tightening cycle comes to an end, several casualties remain, notably highly leveraged companies, which are the most sensitive to interest rates.

While the market performance of utilities-renewables companies reflected a negative correlation with rising interest rates, underperforming the market over the past three years, the Utilities-Independent industry outpaced the market during the same period despite a similar debt burden.

This raises a question: Is a contraction between the two industries on the horizon?

Fig 1: Performance 1YR Horizon

BRIIDGE Shortcut: TS Reference Index

Fig 2: Sales Growth [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

As previously documented [BRIIDGE |20th June], a combination of high valuation levels (driven by speculation) and rising rates precipitated a steep relative valuation contraction of the utilities-renewable industry.

One may wonder about the drivers behind the utilities-independent Power Producers industry, particularly Vistra Corp., which has shown a positive spread exceeding 300% and 200% against the market and the reference sector, respectively, on an equal weight basis.

Does the industry have more growth potential?

A closer look at the fundamentals, however, suggests the long-duration nature of companies in the industry.

In Vistra's case, the high valuations are justified by the diversity of its offerings (ranging from coal, natural gas, and solar to nuclear), competitive pricing, commitment to transitioning to renewables, and, more importantly, the forecasted multiyear increase in demand fueled by AI data centers, electric charging stations, and crypto mining servers.

Fig 3: Operating Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 4: Free-Cash-Flow To Sales [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

While the industry's median PE ratio has remained flat from a year ago, it has quintupled for Vistra Corp. Meanwhile, the company’s fundamentals (leverage, margin, and sales delta) have been in line with the industry for the past four quarters.

Although well-positioned to benefit from a surge in power consumption, a short-term opportunity may be in sight. A combination of the monetary easing cycle (beneficial to utilities-renewables) and elevated valuation (detrimental to utilities-independent) may contribute to a contraction in the spread in the short term as 'price to perfection' meets execution challenges.

Fig 5: Net Income Margin [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 6: Performance [1YR]

BRIIDGE Shortcut: TS Reference Index

Fig 7: Dividend Yield

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA

Fig 8: Net Debt To Ebitda [1YR Rolling]

BRIIDGE Shortcut: BRIIDGE FA | BRIIDGE CUSTOM FA