Shares of Constellation Energy (CEG -0.92%) rocketed 32.2% in September, according to data provided by S&P Global Market Intelligence. Powering the energy company's surge was a deal with Microsoft (MSFT -1.73%) to restart a nuclear power plant. The agreement could help spark a resurgence in nuclear energy in the country, potentially further accelerating Constellation's already robust growth rate.
A powerful growth accelerator
Constellation Energy signed a 20-year power purchase agreement with Microsoft to launch the Crane Clean Energy Center. The power producer will restart Three Mile Island Unit 1, which shut down for economic reasons five years ago. Microsoft will purchase all the power the nuclear energy plant produces to help support its data center operations.
The power company will spend about $1.6 billion to bring the nuclear energy facility back online, which it expects will occur by 2028. It will add more than 800 megawatts of carbon-free energy to the grid, enough to power 700,000 homes. Microsoft is paying a high price for this power (at least double the going market rate, according to analyst estimates), which will help offset the energy used by its data centers with carbon-free energy.
That strong pricing level will help power accelerated earnings growth for Constellation Energy in the coming years. The company expects to grow its earnings per share by at least 13% annually through the end of the decade, up from its previous outlook of 10% annual earnings growth. That's a robust growth rate for a power company, given that most of its peers expect to grow at a mid-single-digit annual rate in the coming years.
The Microsoft deal is also sparking optimism that Constellation will be able to expand its leading nuclear power platform in the future to capitalize on surging demand for low-carbon energy. The company is looking at adding small modular reactors and other new technologies to help provide more power to data center customers.
A surging valuation
Constellation Energy's rally last month has its stock trading at a premium valuation. It currently sells for nearly 34 times its forward PE ratio. That's much higher than the multiples of other large utility stocks, which are between 19.5 and 25. However, the company does deserve to trade at a premium, given its much faster growth. With the potential for more growth ahead, it's worth a look for those seeking a way to potentially cash in on the surging demand for lower-carbon energy.
