Position News Update

Update On Our FAVORITE Idea

Hopefully, you (our readers) have had a chance to read about our favorite idea – independent power producer Talen Energy Corporation (OTC: TLNE).

We first published the idea for our paid subscribers in February and then gave the idea away to our free subscribers in March. Readers who bought when we published at those times are +62% and +26% on their investment, respectively.

You can read the original report here. You can also read an update we published last month after earnings here.

We have also made several videos regarding our thesis. You can see those here:

We remain very constructive on the idea and think the stock has the potential to go as high as $300 from the current level of around $110 to $115.

One of the key points to our thesis is that the company has a relatively under-leveraged balance sheet relative to their peers and their goal.

The company has a stated goal of 3.5x net debt/EBITDA.

For those unfamiliar with those terms…

"Net debt" is the value of their short-term and long-term debt versus how much cash they have on the balance sheet. It means their total debt.

"EBITDA" stands for "Earnings Before Interest, Tax, Depreciation, and Amortization." This is used as a measure of "core" earnings, which refers to the operating profits of the business before the impact of the balance sheet items (debt, depreciation, amortization, etc.) and taxes. Some EBITDA critics exist, but the financial markets widely accept it as a good measure of core earnings.

The closest comparable company to TLNE is fellow independent power producer Vistra Corp. (NYSE: VST), and they are currently at 3.9 net debt/EBITDA. The company's goal makes sense.

The opportunity exists because the company had 1.2x net debt/EBITDA as of the last quarter. Using the mid-point of their current EBITDA guidance ($700 million), they could add another $1.6 billion of debt.

Why would they do that? What would they do with the cash?

The “risk” to some would be that they would go out and buy another company or asset.

We have been vocal that we do not think this will happen.

First, they have consistently SOLD assets and pared down to their base business–generation assets in the PJM market. "PJM" stands for the "Pennsylvania-New Jersey-Maryland Interconnection" and refers to the transmission systems for parts of 13 states and D.C.

Second, the company has been buying back stock. At the end of the last quarter, they upsized the capacity of their share buyback program to $1 billion.

Given the stock's current market capitalization, that would equal approximately 15% of the shares outstanding.

It turns out the company was serious about its intentions with this share buyback.

On May 29, they announced they would "tender" for $600 million worth of stock at a price between $116 and $122 per share.

You can read the press release here.

What does this mean?

The company is going to shareholders and offering to buy their stock from them at $116 to $122.

The stock currently trades at around $112 per share, so this sounds like a good deal – correct?

The answer is "yes," but with some nuance.

First, it is not as if the company will buy back ALL of your shares at that price. If EVERY shareholder decided to sell their stock back to the company (and then dependent on the price), that would be between 8.4% and 8.8% of the total shares.

Let's use 8.5% as the number. If you owned 200 shares, you could tender all of them and would be bought out of 17 of them. If that tender was finalized at $117 and the stock was trading at $112 at the time, you would make a profit of $5 per share or $85.

If you wanted, you could then go in and buy back your 17 shares. The question would be – would the share price be higher than the $117 you were just paid?

We have been asked the following question: What should stock owners do with the tender?

We are not giving individual investment advice, but we would not tender a single share of stock personally.

If we think the stock is going from $150 to $300 across the next few years – why would we sell shares for between $116 and $122?

There might be the chance to make a few dollars on a small part of our shareholding, but it isn't much money. Also, the stock trades OTC or "over-the-counter," and transaction costs are higher there. This would eat into our profits.

Our view – don't tender. Hold on for the long run.

Why is the company making this tender offer?

There are many reasons…

First, TLNE investors have traded around $30 million in shares daily. If the company went out to buy $600 million worth of stock, that would be approximately 100% of the volume for 50 trading days or slightly more than two months.

We guarantee that a single buyer coming in for 100% of the two-month volume would take the stock higher than $122. The company creates the most value by repurchasing the shares at a "cheap" valuation. That valuation is from $116 to $122.

This is the most efficient way for them to do it.

Second, several large shareholders have been involved since the bankruptcy. They have huge profits.

If we were one of those portfolio managers - and had made three or four times our money – we would like to book some of those profits, even if we think the stock goes much higher. Some might even have a mandate (rules) for their strategy that forces them to do so.

This is an efficient way for that to happen.

Third, we also think the company wants to use some of its debt capacity so that a potential acquirer won't "use their leverage against them." Instead, they would return this cash to shareholders via buyback and drive the price higher so that an acquirer would pay more.

One last point – the company plans to do an "uplisting," moving the stock from the OTC exchanges to one of the "listed" exchanges. Most likely the New York Stock Exchange.

Why tender for the shares BEFORE the uplisting?

The same reason as before – they want to buy the shares cheaper and likely think (as do we) that the stock will trade higher after the uplisting.

We applaud the management's move here with this tender offer, and they continue to impress us with their moves.

We continue to love the stock, and if you don't own it (or a full position), we would BUY IT RIGHT NOW.

Do you own TLNE stock right now? What are your thoughts? Tell us more in the comments section below or email us at [email protected].


or to participate.