Citigroup Upgrades GenOn Energy to Buy (GEN)

Citigroup is out with a research report this morning, where it upgrades shares of GenOn Energy

to Buy/High Risk, from Hold/Speculative; it has a $5.25 price target on the stock, up from $4.50. The Citi analysts cited their own upgrade of PJM capacity price forecasts, noting that they view the negative headline risk from the NJ bill subsidizing up to 2,000 MWs of new power capacity has passed. The analysts anticipate PJM will file a Section 205 filing in the next few weeks with FERC to address the NJ legislation and ultimately believe FERC will adjudicate changes to the capacity market rules that will largely mitigate the capacity price impact of the legislation. As for valuation, the analysts remarked, “For our EV/EBITDA valuation we use 2013E Open EBITDA and an 8.0x target multiple for the business. We have historically observed merchants trading in a cyclical range of 6.5x-10.5x over the course of the prior cycle, with a mid-cycle multiple of 8.0-8.5x. Our target multiple of 8.0x is in-line with the sector's mid-cycle EBITDA target multiple.”