We remain neutral on AES Corporation (AES) given its focus on long-term supply contracts, exposing the company to commodity price risks and making it unable to pass on any escalation in prices of coal and natural gas to its customers. The company’s power generation portfolio is also skewed toward coal and gas, thereby increasing the burden of green investments.
AES Corporation reported fourth quarter 2010 adjusted EPS of 23 cents, lower than the Zacks Consensus EPS estimate of 25 cents but an improvement over the EPS of 22 cents in the year-ago quarter. The year-over-year growth was attributable to favorable operating results in Latin America and a lower effective tax rate, partially offset by a settlement agreement for gas transportation contracts at a Latin American generation business, higher share count and increased business development costs. Total revenue in the quarter was $4.4 billion versus $3.8 billion in the year-ago quarter.
AES Corporation’s businesses encompass 28 countries across 5 continents representing a highly-diversified earnings base. Geographic diversity has resulted in a portfolio that is well-positioned for capitalizing on regional differences in power prices and weather-driven demand and also insulates the company from specific risks in any single region or country.
The company is investing a substantial chunk of funds for capacity expansion in the power hungry regions of Latin American and Asia, putting the company in an advantageous position compared to its peers who remain focused on North America. Steady economic growth and power demand in the emerging markets provide an avenue to offset to some extent the continued erosion of profitability in North America.
AES Corporation has a strong balance sheet compared to its peers with a low long-term debt-to-capitalization of 61.7% at the end of fiscal 2010. The company continues to be a strong cash generator, having generated operating cash flows of approximately $3.5 billion in 2010 and ending 2010 with a cash horde of $2.6 billion. We expect AES Corporation’s strong liquidity to stand in good stead for any earnings accretive acquisitions, investments for organic growth, as well as its ongoing $500 million share buyback program announced in July 2010. As of February 25, 2011, $388 million of the $500 million authorized remained available under the stock repurchase program.
On the flipside, AES Corporation’s focus on long-term supply contracts exposes the company to commodity price risk. The company would be unable to pass on any escalation in prices of coal and natural gas to its customers. Profitability at its regulated utilities depends on regular rate relief around the globe from their service countries. Further, the company’s substantial generation capacity under construction in emerging countries may face cost escalation and over-runs. This will impact the company since its earnings are fixed given its long-term delivery contracts for utility projects.
AES Corporation’s power generation portfolio is skewed toward coal and gas, thereby increasing the burden of green investments. The company is also rapidly increasing its generation capacity and significantly focusing on fossil fuel plants. However, with the steady improvement of the global economy, demand for coal, specifically from China and India, is raising the price, attracting supplies from across the world. This invariably puts the additional burden of hedging on the company’s ability to smoothly run its coal based generation assets.
Arlington, Virginia-based AES Corporation is a global power company and is involved in the generation, distribution, transmission and selling of electricity to end-customers in the residential, commercial, industrial and governmental sectors. It competes with Edison International (EIX) and Duke Energy Corporation (DUK). We currently have a Zacks #1 Rank (short-term Strong Buy recommendation) on the stock.
AES CORP (AES): Free Stock Analysis Report
DUKE ENERGY CP (DUK): Free Stock Analysis Report
EDISON INTL (EIX): Free Stock Analysis Report
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