Power generation and electricity specialist NRG Energy (NYSE:NRG) is making headlines on Thursday as management attempts to gain support for its vision of the company. On the other hand, activist firm Elliot Investment Management is seeking a massive executive shakeup. Today, NRG stock is up about 3%, likely on the implications of a more focused direction from the company.
According to The Wall Street Journal, Elliot is in talks with potential candidates to replace current CEO Mauricio Gutierrez as well as other high-level execs. Last month, the activist fund disclosed that it took a $1 billion stake in NRG stock. This represents a roughly 13% interest in the company.
In a public letter released in May, Elliot laid out three core steps necessary for NRG to right the ship. Specifically, the activist firm is seeking a leadership change to refresh the board of directors and help navigate the enterprise. It’s also seeking operational improvement and reliability as well as “at least $500 million of recurring, EBITDA-accretive cost reductions.” Finally, the fund is demanding strategy and capital allocation, including a “strategic review of its home services strategy, including Vivint.”
A Tug-of-War for the Fate of NRG Stock
In the letter, Elliot states that it disclosed a large investment in NRG stock in 2017. The activist fund further remarks that it’s “engagement with the Company catalyzed the highly successful Transformation Plan and resulted in NRG becoming the best-performing stock in the S&P 500 in that year.”
However, following the end of this prior engagement with NRG, Elliot says that the company “has meaningfully underperformed due to a number of operational and strategic missteps.”
Of course, most notably, Elliot completely disagreed with the company’s Vivint takeover. Not only that, but the market also seemed to disagree with the acquisition. Last December, NRG announced that it would buy the home-security business and NRG stock cratered as a result. Over the past one year, shares are down more than 7%.
Nevertheless, management intends to fight back. In an investor day scheduled for earlier this morning, the leadership team planned to emphasize that its $2.8 billion acquisition of Vivint has boosted NRG’s overall progress. Execs say the firm is “already tapping into more residential homes and cross-selling across its business thanks to the deal.”
Further, WSJ reports that NRG now “expects to achieve $300 million of incremental free cash flow before growth by 2025.” The company has also discovered “another $150 million in cost cuts to be completed by 2025, partly because of automation.”
Still, the pop higher in NRG stock following Elliot’s shakeup news may be telling.
Why It Matters
According to data from TipRanks, Wall Street analysts peg NRG stock as a consensus “moderate buy.” This assessment breaks down as two “buy” ratings, three “hold” ratings and zero sells. The average price target for shares lands at $40.50, implying more than 15% upside potential.
On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
