TransAlta (TSX: TA) is a Canada-based power generation company that produces and supplies electricity across Canada, the United States, and Western Australia. Yesterday, the company reported strong third-quarter results, surpassing analysts’ revenue and earnings estimates. Revenue reached $536 million, exceeding the consensus estimate of $521.7 million, while adjusted earnings per share (EPS) of $0.18 significantly outperformed expectations of $0.05. The better-than-expected results boosted investor confidence, driving the stock up approximately 4% yesterday.
Despite this recent rally, TransAlta shares remain 24.7% below their 52-week high, potentially presenting an attractive entry point for long-term investors. Against this backdrop, let’s examine the company’s latest financial performance, growth opportunities, and valuation to determine whether its stock is worth buying now.
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TransAlta’s third-quarter performance
TransAlta reported operational availability of 92.6% during the quarter, slightly below the 92.7% recorded in the same period last year. Meanwhile, its revenue declined 12.8% year over year to $536 million. However, lower fuel and purchased power expenses and carbon compliance costs helped expand its gross margin by 16.4% to $411 million. Consequently, gross margin as a percentage of revenue improved significantly to 76.7%, up from 57.4% in the previous year’s quarter.
Furthermore, lower operating, maintenance, and administration expenses, along with reduced depreciation, amortization, and asset impairment charges, drove operating income to $146 million, up from $11 million a year ago. Management attributed the improvement to strong fleet availability, disciplined asset optimization, and contributions from its environmental credit portfolio. In addition, optimization and hedging programs enabled the company to capitalize on higher realized prices, further supporting its financial performance.
Reflecting these improvements, TransAlta reported net income of $63 million, reversing a net loss of $62 million in the prior-year quarter. Its adjusted EPS (earnings per share) also improved to $0.18 from a loss of $0.02 per share. Meanwhile, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) increased 10.9% to $264 million. The company also generated $132 million in cash from operating activities and $93 million in free cash flow, highlighting its healthy cash generation.
With its third-quarter results demonstrating improved profitability and solid cash generation, let’s examine TransAlta’s growth prospects.
TransAlta’s growth prospects
Electricity demand is growing across the United States, Canada, and Australia, driven by the rapid expansion of data centres, semiconductor manufacturing, transportation electrification, and broader economic activity. This rising demand creates significant long-term growth opportunities for TransAlta. Capitalizing on this favourable environment, the company is expanding its asset base through organic investments and strategic acquisitions while optimizing its existing portfolio.
Last month, TransAlta completed the acquisition of Mountain Peak Power and Canyon Peak Power from Blackstone for $1 billion. These fully contracted, natural gas-fired peaking facilities could add 318 megawatts to its power generation capacity. Meanwhile, the company is streamlining its portfolio by selling its 49% ownership interest in a 500-megawatt wind portfolio in Oklahoma to Ares Infrastructure funds for US$305 million. These strategic moves should help TransAlta strengthen its generation portfolio and improve capital allocation. Furthermore, continued focus on sustaining capital investments, operational efficiency, and cost management could support margin expansion and strengthen its financial performance over the coming years.
Investors’ takeaway
Backed by its consistent financial performance, TransAlta has generated impressive total shareholder returns of approximately 287% over the past decade, translating into an annualized return of 14.5%. The company also has a longstanding history of rewarding shareholders through regular dividend payments. It currently offers a quarterly dividend of $0.07 per share, yielding approximately 1.5% on a forward basis.
From a valuation perspective, TransAlta trades at 2.6 times its projected sales and 32.7 times its estimated earnings, indicating a relatively expensive valuation. However, its favourable long-term growth outlook, improving profitability, and solid financial performance could support further upside. Given these strengths, I believe TransAlta is worth considering for investors seeking long-term capital appreciation and a modest stream of dividend income.
