Good Morning. This is the Investor Lookout with Friday’s deep dive. The first company on our list is Talen Energy. A reborn utility company with a strong moat.

Here are the sections of our deep dive:

• 🏁 Introduction

• 🧲 Mission and Market Appeal

• 📈 Growth Catalysts

• ⚠️ Risk Factors

• 💰 Valuation

• 🔚 Conclusion

Human civilization is built upon the use of energy. As technology grows, so does the need for more energy. My first pick for Friday's deep dive is Talen Energy ($TLN). The company has a turbulent past, filing for bankruptcy in May 2022. Even though this usually doesn't inspire confidence, it was commonplace in those years in the nuclear industry.

Resurfacing in 2023, the company is now one of the best performers in the industry and looks to have an electrifying future. The remarkable turnaround is validated by the stock being one of the best-performing energy stocks in 2024. Talen has over 10 GW of capacity, 2.23 GW of which is nuclear power. This nuclear foundation provides stability in an increasingly energy-hungry market. Strong projected revenue growth makes us rate Talen with a Buy signal.

Key Stats

• Marketcap $9.23B

• EPS (FWD) $8.03

• PE (FWD) 22.55

• Volume $983.393

• Prev. Close $177.98

• Net Income: $827.4 million

• FCF: $587 million

TLN is an independent power producer. It primarily operates within the PJM market in the northeastern US. Talen's financial profile has strengthened considerably, with EBITDA guidance increasing by 30% and 50% for 2025 and 2026. This improvement reflects operational efficiency and strategic positioning in the market. The company's power lies in its innovative behind-the-meter approach to building a data center and two nuclear reactors that go with it. The Inflation Reduction Act also protects its margins for over 2 GW of nuclear power generation.

PJM Interconnection is the largest US electrical grid operator. It is one of seven different RTOs (Regional Transmission Organizations) and ISOs (Independent System Operators). This market delivers power using a method called Base Residual Auction. It's an auction held three years before the current year. On July 30th, they announced a price surge from June 2025 until May 31st, 2026, with a price of $269.92 per MW-day. This is a massive increase from $28.92 in last year's auction. In the previous 10 years, no year has been close to this figure. The highest was $164.77 per MW-day in 2018/2019.

• PJM had an 8.68% unforced capacity drop

• The capacity drop increased costs to consumers up to $14.7 billion, a considerable increase from $2.2 billion the previous year

This is excellent news for Talen Energy. According to a press release, the company thinks this will result in $670 million worth of capacity revenues during these price surges.

Another growth catalyst is Talen's unique proposition, the Susquehanna nuclear power plant. The two nuclear reactors stand out because the company had the foresight to build a data center on its property. This data center was then sold to Amazon for $650 million while also securing a long-term power purchase agreement contract from Amazon.

The Amazon deal does have its hiccups. Competitors Exelon and American Electric Power Company issued complaints to the FERC (Federal Energy Regulatory Commission) to block the deal. Their case rests on the idea that $140 million in annual transmission costs will go to PJM consumers. TLN fights back by saying that those complaints are misguided. Other market risks include exposure to natural gas prices, data center demand sustainability, and aging infrastructure management.

The 30% and 50% increase in EBITDA for 2025/2026, along with greater Price / Cash Earnings multipliers (16x vs 12 x) that include the Amazon power purchase agreement, makes the share target price increase to $220 for 2025. The AI data center demand for energy will be a crucial part of Talen's growth, and this space remains to be watched. TLN also announced a $1.2 bn buyback of around 8% for each share. The price target for 2026 stands at $314, a healthy increase from the current levels, as the Amazon deal is starting to make an impact, and demand will drive prices up. The move to a full Nasdaq listing will also get the company into more indexes and increase demand for the company's shares.

• Compared to the competition, Talen has the highest upside at 29%, with peer avg 8%

• Growth for 2025 is 17%. Only company able to match this is Vistra ($VST), with the same percentage points.

• Cash EPS growth is a standout for 2025, 40% for Talen and 10% for average peer

Talen Energy is well-positioned to take advantage of the upcoming AI demand and the inevitable capacity price increases. The increase in PJM prices is a strong foundation for growth with minimal cost. The difficulty of adding new capacity to the market and increasing data center demands suggest the favorable conditions will persist in the short to medium term. The nuclear assets and Amazon PPA place the company in a unique value proposition compared to its competitors. The increasing energy delivery to Amazon, up to 960 MW by 2034, means that TLN has a strategic industry positioning that could be hard to beat.

The new management seems determined not to make the mistakes of the past and has steered the company into one of the best-performing energy stocks. The growth is projected to continue as strong free cash flow generation and an extensive buyback program can create upward pressure on the stock price.

• Analysts forecast growing demand for reliable, clean power for AI infrastructure.

• Nuclear energy is increasing in value

• The company provides energy to Amazon at a premium

With a price target of $220-260, a 45% upside from the current levels, Talen Energy is a compelling option for investors seeking exposure to both the energy transition and the AI infrastructure boom.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.