Episode 96 | Constellation Energy is Powering the AI Revolution

In Episode 96 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, analyzes Constellation Energy, one of the largest nuclear power producers in the US and key beneficiary of rising electricity demand driven by AI and data center expansion. He discusses Constellation’s merchant power model, carbon-free nuclear fleet, growth prospects, and strategic assets, including the restart of Three Mile Island and the acquisition of Calpine. The episode examines how growing power demand is creating new opportunities across the energy sector and why electricity generation has become a critical component of the AI investment story. Professor Lake also discusses the broader implications for investors as companies race to build the infrastructure needed to support the next wave of technological innovation.

Transcript

Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. Today we're coming to you from the George Washington University School of Business.

Duquès Hall, Duquès family studio. This is a George Washington University Investment Institute podcast. Remember investment disclaimer here, not investment advice or disclaimer, generally speaking, this is entertainment. Educational purposes only up front. Today we're going to cover a single company. So we're not going to do a broad based setup, but we're going to go over one single company. We're going to use the GW Investment Institute framework, business, management, price valuation, and balance sheet to evaluate that as we typically do.

So buckle up here. This company is in the energy business and the company is Constellation Energy ticker. CEG. All right. So let's dive into the company. You might have heard about this. You would say that okay this is the biggest renewable play out there, a lot of nuclear here. Carbon free as people call it and sustainable solutions for the business, a lot of nuclear.

That's it. And it's mostly merchant versus regulated. So meaning that they sell to the highest bidder. It's not a regulated. Most of the power that they produce is not regulated. So what's been you know what's been sort of the push for this. Well, as we've been talking about before, AI continues to be on high demand here. And if you listen to Jensen Wong recently talked about what's the choke point here for the business, it is energy energy production.

So constellation here carbon free that part of the market plus high demand plus merchant power. This is at the center of that. And but it's been very volatile ride here so. Well let's let's talk about the company. All right. So let's let's dive into some stats here on the company. What does this company look like from the standpoint of market cap?

And again energy producer. So utility a little bit divergence from you know we do a lot of tech companies here sometimes retail but a little bit different. Power company, power producer a lot of nuclear power. One of the largest fleets in the US and certainly one of the largest dedicated merchant fleets in the US. The market cap here.

So divergence from some of our super large companies that are in the trillions of dollars. This one is sub 100 billion. You would say, well that's a small company still large company. Market cap $93 billion. This is as of towards the end of May here in 2026. All right. So why Constellation what constellation has been. And we've we've owned this company in the past.

Why Constellation? Well Constellation is a company that lots of people talk about. You know, at the center of this AI revolution, they're going to be bringing back, for example, the reactor one, which is in Three Mile Island with a deal with Microsoft as an example. But they owned lots of nuclear operations across the country and others as well.

But then the carbon free world, very good there. And so people would say, okay, well this is a great and we own this company currently. Again, we've owned it and we still own it and a couple of our portfolios. So it's been an interesting company and certainly it's been up and down also. But let's talk about the business.

And so they are merchant power producers. So they're subject obviously to the whims of the market. And right now everybody has been saying well this is a great place to be in and we'll get into the sales numbers. But again, lots of power generation, 21 nuclear reactors across, you know, 12 different facilities. This is obviously a fantastic place to be right now with this tailwind coming in.

And you know, pricing power, obviously it's a commodity product. But since super high demand and you talk about Jensen Wong saying, okay, the choke point here is on the power side. So very good there. All right. So what are we going to give it before we get there. Let's get into the sales for the company. All right. So let's let's dive in.

You look back. Well let's let's tackle this fiscal year here. Last year is a 12/31. So if you look at that it's 25 billion in revenue and the trailing 12 months 29. So not it's a year over year. That's a big jump. But you know year to year from 24 to 25 not a huge jump. But the trailing 12 months has has been a jump.

And remember we care about what's happening in the future which we'll talk about in the second. But let's go over where it's been. So in 2022 at 24 billion, 23, basically the same, a little bit higher 2%, you're talking and then dive down to 23 billion 5 So minus in that category. And then you know back up a little bit and basically the same from 24.

And then jump from 20 to 25 here in the trailing 12 month 26 to 29 billion. Excuse me a little bit all over the place if you didn't follow that. But pretty modest growth until recently. Now why recently you think about that? So and let's talk about where the company is going. So what's the the mode that everybody's in? AI we need we need more power.

We need more data centers. And obviously to power those things you need electricity. So the 12/31/2026 full number, 31 billion. So that's a 23% increase. And then 2027 drop into 7% growth 33 billion. So the variable growth rates, not super high certainly not in the same category as our tech companies. And remember we can own anything. We don't have to own anything in our portfolios at the GW Investment Institute.

But our students, you know, this one found a way to some of our portfolios. We certainly have utilities as part of our energy and utility sector for our two fundamental funds. So this would be a natural idea for somebody to have. Now this again varies differently than some of the tech companies we talk about. This is high CapEx.

So Broadcom which we recently talked about low CapEx light you know CapEx light model. This is a heavy CapEx burden here. You're buying nuclear fleets. And so they recently acquired Calpine set of assets. So and we'll talk about the balance sheet when we get to that. So you know is this a good business? Is this a great business?

You know I would think at the moment given what's happening in the world, you'd probably call this a good business. We give it an 8.3. We're getting we're fine tuning some of these scores here. 8.3 for the business. It's good. I wouldn't call it great, but it's okay. And I would put it in the good category.

And again I think you really have to consider well where is this going.

And let's uncover a little bit of that 8.3 here. So on the gross margins not bad right now. So you're talking for the trailing 12 months through 3/31 44% gross margins. And if you look over the years that's been improving. And so if you look at the 2022, you're at about 30% gross margin, 35 in 23, 51 in 24, 42 down in 25.

And then the trailing 12 months, 44 projected is 46 for the full year 2026. That's a 12/31 for their fiscal year. And then, you know, so you're thinking, okay, that's not bad. So for the gross margins, 44% going out to 2027. So again this is not bad. These are, these are good rather gross margins not elite Broadcom, Nvidia that we talked about, Visa certainly a different type of business.

But you know for a very capital intensive business these are pretty good gross margins. Now again you're having this huge tail wave of this tailwind rather of AI build out an AI infrastructure. So now let's look at the net margins here. So you go down to the net margins. You know this is where it looks like a utility business.

And so when you look at the trailing 12 months 10%, the full year, 25 11%, full year 24 11%, full year 23 6.8, full year 24 negative. All right. Or 22 negative. All right. So obviously we care about where things are going. Where are they now? Where are they going? That's what we care about. All right. So if you look at where are they going? 13.1% for the full year of this year, 12/31/2026 and 14% for the 12/31/2027.

Again, these are okay. And you could probably press that score down. We gave it an 8.3. This is okay. All right. So now let's look at the cash that you need to run this business. You know okay 3.4 in CapEx here for trailing 12 months. And the expected you know 4.4 for the full year generating 3.9 is expected free cash flow.

So again heavy CapEx burden not great as far as you know where we would like to be with respect to, you know, free cash flow generation as compared to some of these other companies. And so this is not a you know, this is not the high cash flow business that Google is going to be or that Nvidia is going to be.

So not bad, you know, and again, let's go out to the next year what we care about 4.1 billion for 12/31/2027. So these are these are good numbers. These are not great numbers. And so 8.3 seems like a fair to, you know, giving it actually a lot of credit for being at the center of this AI build out demand for power, demand for clean energy on that given its composition of its fleet, a lot of nuclear and so carbon free as the market likes to call it right now.

So that's in a very good position. So let's see what happens there. And they've been effective at this. So now again we gave that 8.3. Let's move on to the management here. So management's done a relatively good job. Joseph Dominguez is doing I think a very good job of position the company for what's happening. He's been there you know not forever but but certainly has has done a nice job coming up on five years here as CEO.

Now it's been, you know, a compilation of assets along the way. Baltimore Gas and Electric is the history. It's based in Baltimore, Maryland. This nuclear fleet that it has, Calvert Cliffs, one of the big facilities in Maryland, and Three Mile Island. Bringing that back on doing some innovative deals with Microsoft to buy that purchase power. They have this purchase power agreement with them.

Again, this is not this is mostly not regulated utility. This is mostly merchant, meaning that they sell into the PJM, for example. And so when the prices go up they benefit from that. And so if you feel like well how is this supply demand? So when you look at supply demand for power, obviously you don't create a, you know, power plant overnight.

It does take time. It takes time to permit. It takes time to build. Certainly on the nuclear side, it takes years and years. And there's a real scarcity value, let's say on on that those assets for the nuclear and they they generate lots of baseload power, which is fantastic. And so I think that's where you can give the business a little bit more credit on that.

And the management has done a good job of putting these assets together. They bought the Calpine portfolio. And you know, you could say, well, maybe they overpaid. But right now they're they've put themselves in a good position to succeed and they're in a position to succeed. Now some of that depends on is the AI buildout going to continue at the pace that everyone thinks?

Well, I think that's obviously anyone's guess. And for the way that everyone's positioning your portfolios on the AI front, having power as part of that is an interesting way to play it from that point of view. And if you listen to Jensen Wong recently talking, that power is going to be one of the things that is in the scarcity category and people are going to need to solve for we need something like a thousand times more power.

Now, the natural question then is, well, how much of that is going to get built on the ground versus how much of that ends up in space? And you have the data centers in space? Couldn't resist going to another episode without mentioning the data centers in space. So I think it is an interesting challenge for that. Now, does one win versus the other or does it take some time?

I think there's at least as an analyst some room to think about. Well, in the short and medium terms, both of these. And maybe that's one, three, five years, how do you get from one to the next? It's probably not going to be a switch where it goes from one to the other overnight. Now, if you need a thousand times more power, probably you're going to need a different setup.

Are you going to be able to build a thousand times more power infrastructure on the ground? Probably not. Probably. That's going to have to go to space where you have 24/7 sunlight, and you're going to have to manage those data centers in space if you're going to really talk about 1000x. And so two orders of magnitude, that's a very different setup.

Now, how does it happen between now and then? A lot of demand for the the assets on the ground. And if you have a merchant set up portfolio like Constellation does, if you have a carbon free mostly a lot of nuclear baseload, consistent generation like Constellation, then you're well positioned, let's say over the next 1 to 3, 5 years, as even if, let's say that transition happens, well, it's going to take some time.

So this portfolio of assets is well positioned. So you can give credit to the current management team for doing a good job of setting that up. And so do we know. Obviously nobody knows what the future holds. But the current management team has put a good compilation of assets together, and Dominguez has done a reasonably good job of shepherding the company along and doing, I think, a reasonably good job of that.

So what are we going to give that gave 8.3 to the business, 8.2 to the management. So good. Maybe not great category. Now let's jump into the price versus the valuation. Now this is we're going to ding them here. This has not been a good setup. So if you look at the price versus the valuation 22 times doesn't sound crazy.

But certainly for a utility company with, you know good I would say gross margins. But you know okay what you would call, you know, these utility net margins. And so if you look at the you know the forward PE well depending on where you're going, you're still above it's pure category. So you probably ding it. Their earnings yield low.

You ding it. They're depending on what you're thinking for the you know the guide forward the earnings okay. And so obviously you're getting a premium right now for this collection of assets. And so we're definitely going to I think need to ding the valuation and bring that down I would say 6.2 here on the valuation side. And so for this mix of utility assets we already gave it credit in the business.

We already gave it credit for the management team for putting these together, for getting the Calpine acquisition done, for owning these assets with this tailwind. So they got credit in the business. They got credit in the management 8.3, 8.2 respectively. On the valuation side, they you know, you could say they've paid up for this in a variety of different categories.

And the market is appreciating that really well. So if you again look at the forward PE versus peers that's at a premium. So 23 to 24 times versus let's say 15 times versus its peers on the forward side 24 doesn't sound crazy. For example, compared to, you know, large tech company. But for a utility company that's heavy on the CapEx side, these are large numbers.

So an earnings yield low about 3.8%. So this is not you know we talk about utility. You were thinking okay what's earnings yield for this steady cash flow. Again this is your, the idea behind constellation is more about what's in the AI play and what's happening moving forward. So if you're really thinking about where the company is positioned right now, I would say on the valuation side again, we gave it credit 8.3, 8.2 for business, for management respectively.

We're given it a 6.2. Now on the valuation for those areas that we talked about. So you know okay, you know not not great. And certainly you would call that probably you would put that in the below average category at a 6.2. All right. So let's move on to the balance sheet. And then we'll pull everything together there at the end.

All right. So on the balance sheet side you know this is okay. Credit rating here. This is utility company. We don't usually talk about credit ratings but it's a utility company. So they carry debt. They have a lot of assets. The credit rating here triple B1 and triple B+. You know you'd probably put that as a 7.0 interest rate coverage.

You know 7.5 times. We definitely would love to have a better setup than that. We like to be closer to ten. The the post, Calpine debt to equity, you know, 145%. That's not great on the performance side. So you probably doing that at a 5.8 Altman Z score here. You're talking about a 6.2. This is not great.

Liquidity cash 3.6. Free cash flow improving 7.2. So if you put all that together that's a 6.8. That is an okay setup not a great setup. That is an okay set up. So 6.8. So all right let's pull all those together. So again we're giving it lots of credit. Segue is the ticker constellation on the business side for being and the right spot at the right time.

What the great collection of assets. That's an 8.3 for the business, the management, great job Dominguez for putting this together and team, giving them credit again for being in the right place at the right time. Putting these ads together. 8.2 on the price versus valuation again as we talked about okay. There. Again, the higher the high forward PE compared to peers is tough.

And low earnings yield 6.2. And on the balance sheet 6.8 again below average. You know we would like to see better metrics here. The post Calpine acquisition obviously boost up the debt to equity ratio. The credit rating is is okay. Interest coverage is okay. We'd like to see that better 6.8 there. So when you pull all that together that's a 7.4 for Constellation.

Again not investment advice. Seek investment counsel if you need it professionally. But if you're an investor, business person, analyst, I also encourage you to be checking out what's happening in the power business, what's happening in this world. Because as Jensen Wong mentioned, you have a thousand times more power. So understanding who are the players in there, what's happening in that space I think is very important.

So check out CEG on your own as well. Put some comments there. We'd love for you to come back and watch the next episode. But that's it for this episode of Market News with Rodney Lake. Thank you.