Talen Energy: A Nuclear Power Stock That Can Keep Winning

Key Points

• Talen Energy has been one of the hottest stocks in the market this year.
• The company's deal with Amazon and the path of future energy prices look very favorable.
• Other significant tailwinds sweeten the pot for Talen Energy.

Nuclear energy companies have been big winners in the stock market thus far in 2024, and Talen Energy NASDAQ: TLN is no exception.

The stock has provided investors with a total return of 186% this year, and some analysts on Wall Street see a big upside remaining in the mid-cap utility stock.

The company’s biggest bull is JP Morgan, which recently initiated a $268 price target, implying an upside of 47% in the name. 

Talen Energy's Business and Strategic Deal with Amazon: A Detailed Breakdown

Talen hasn’t been publicly traded for all that long. The company began trading on over-the-counter markets in July 2023. It was listed on the NASDAQ on July 10, 2024. As of Jun. 30, the company owned and operated approximately 10.7 gigawatts of power infrastructure in the U.S. However, only around 21% of this comes from nuclear, generated from the company’s 90% interest in the Susquehanna facility in Pennsylvania. Natural gas and oil generation make up 59% of capacity.

The remaining capacity comes from coal-powered plants. Most of the coal generation capacity comes from the 1.3 GW Brandon Shores facility, which the company is looking to shut down. However, due to regulatory requirements, it will continue to operate through 2028.

Most of the company's generation capacity is not nuclear, but it is the part of the business investors are excited about. Talen built a data center campus near its Susquehanna facility, which it later sold to Amazon NASDAQ: AMZN Web Services, also known as AWS. In addition to selling the data center, the Susquehanna facility will provide the energy for at least 18 years through a Power Purchase Agreement (PPA). On the sale of the facility alone, Talen achieved a return of 250% on its initial investment.

The company has a great opportunity to generate very strong margins in this PPA. The nuclear production tax credit (NPTC) created as a result of the Inflation Reduction Act builds an inflation-adjusted floor for nuclear energy prices of between $40 and $44 per megawatt-hour (MWh). In 2023, the company was able to generate nuclear energy at $24 per MWh. Assuming consistent costs, this represents a 67% to 83% margin on this energy at a minimum, as the deal also provides Talen with a premium on these rates. AWS pays fixed rates, so Talen may lose out if energy prices really spike.

How Talen Energy Is Positioned to Capitalize on Rising Future Energy Prices

However, not all the capacity at Susquehanna will go to the data center. In fact, only a maximum of 44% of the capacity Talen owns will. They will sell the remaining energy to the grid. This means that the company will also be able to enjoy higher energy prices, as the rates sold to the grid are not fixed and are also backed by the NPTC.

There is reason to believe that electricity prices will rise. PJM Interconnection, the regulated utility buying the leftover power, expects power demand to outstrip supply growth over the next 10 years due to current trends. This leads to the conclusion that prices should rise, benefiting Talen. Overall, this and the AWS deal provide a great balance for Talen. It has a secure and stable long-term contract with a built-in premium with the PPA and upside potential based on higher energy prices with PJM.

Additional Tailwinds Make Talen a Winner Going Forward

Another way Talen can continue returning value to shareholders is through share repurchases. The company recently reloaded its share repurchase capacity, giving it the ability to buy back up to $1.25 billion worth of shares.

At the company’s current market capitalization of $9.3 billion, that equates to over 13% of shares. The company has already bought back $892 million worth of shares in 2024, showing that it is not afraid to pull the trigger.

Additionally, some important market indexes, namely the Russell 1000, can now include the company. Inclusion in it would boost demand for shares as passively managed funds must buy the stock. Overall, this stock has many tailwinds behind it and is one I personally see as a strong investment going forward despite its massive run-up.