We recently upgraded our recommendation for Ameren Corporation (AEE) from Neutral to Outperform.
Ameren’s stable and regulated electric power operations in the Midwest generate a relatively stable and growing earnings stream. Future growth will be guided by improved plant operations, a focus on cost management, allowed an ROE of 10% (Missouri and Illinois), a recovering economy boosting industrial sales, and installation of emissions reduction equipment (scrubbers) at its generation plants.
In light of the recovering economy, Ameren is focused on developing the electric transmission infrastructure in its service area (Missouri and Illinois) through investments worth $3 billion over the next 10 to 15 years. The first in line is the ambitious $1.3 billion Grand Rivers project, a 345 KV line across the state of Illinois from the Missouri border to the Indiana border. The company expects to finish the project by 2021.
Ameren’s Missouri service area’s economy is experiencing lower unemployment rates (9.3%) compared to the national average (9.6% as of August 2010) per the U.S. Bureau of Labor Statistics.
Meanwhile, Illinois is staging the eighth straight month of lower unemployment compared to the national average, reducing the rate to 9.9% as of August 2010. Steady improvement in its service areas will perk up consumption of electricity, boosting the top line.
Ameren’s Merchant Generation business with low-cost generation assets is adequately hedged to absorb any near-term demand shocks. Also, with the expected recovery in power prices, the merchant generation segment will bring a spike in margins.
Ameren has a strong balance sheet compared to its peers with a low long-term debt-to-capitalization of 48.3% at the end of the first half of 2010 (Zacks industry average was 78.6%).
The company continues to be a strong cash generator, having generated operating cash flows of approximately $772 million in the first half of 2010. The company closed the first half of 2010 with cash and cash equivalents of $622 million, and a $2.1 billion credit facility. Total long-term debt of approximately $7 billion is in the form of fixed rate instruments (Bonds and Notes) with only $354 million due in the near-term.
Management has rewarded shareholders by returning a substantial portion of its free cash flows through dividends over the years. However, faced with the economic downturn causing cascading sales, the company reduced its common stock dividend in February 2009 by 39% to $1.54 per share annually from $2.54. Despite the cutback, Ameren’s shares offer a high 5.3% yield with the $1.54 annual dividend (Zacks Industry Average 3.7%).
The Ameren stock is currently trading at a discount to its peers like, PPL Corporation (PPL), DTE Energy Company (DTE), CPFL Energia S.A. (CPL) and Companhia Energetica de Minas Gerais (CIG). However, given the stable base of regulated operations and expected margin boost from a spike in merchant power prices, the discount is unwarranted.
Also, the company’s focus on cost minimization, strong balance sheet and an above industry average dividend yield add value to the company and supports our bullish outlook for Ameren. As such, we fundamentally think that there will be a potential gain for the stock in the near term.
AMEREN CORP (AEE): Free Stock Analysis Report
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