Ameren Corporation (AEE) reported second quarter 2010 earnings of 73 cents per share, sweeping past the Zacks Consensus Estimate of 50 cents on strong electricity sales and disciplined cost management. Earnings, however, were 2 cents short of last year’s 75 cents.
Analysts have had more than a week to digest the news. Below, we cover the earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock.
Earnings Report Review
Ameren’s net earnings were $152 million, compared with the year-ago quarterly net income of $165 million. Net revenues in the quarter rose 1.2% from the year-ago quarter to $1.7 billion, with both Electric revenues and Gas revenues jumping 1.2% to $1.53 billion and $171 million, respectively. Quarterly revenues were, however, short of the Zacks Consensus Estimate of $1.9 billion.
Sales of electricity to native load utility customers increased 9% year over year in the reported quarter, driven by a recovering economy, the return to full capacity in March 2010 of a large customer’s aluminum smelter plant and a warmer summer.
Kilowatt-hour sales to industrial customers rose 26% (17% excluding sales to the smelter plant). Sales to residential customers rose 4%, and sales to commercial customers rose 1%. Merchant generation revenues and margins in the quarter declined versus last year, as a result of lower realized power prices and higher fuel and related transportation costs.
(Read our full coverage on this earnings report: Ameren Sweeps, Raises Outlook)
Agreement of Estimate Revisions
Following the second quarter earnings release, analysts maintained a strong positive view regarding Ameren’s 2010 outlook. In particular, there hav a notable number of estimate revisions over the past 30 days, indicating that revisions were in response to the company’s second quarter earnings release. Out of 7 analysts covering the stock, six have revised their estimates for 2010 upward, while none have gone in the opposite direction.
This uptrend in estimate revisions reflects strong near-term financial results from the company’s regulated businesses and focus on cost structure improvement of its Merchant Generation business. Lower cost structure will help the company to counterbalance the ongoing trend of low power prices and will act as a margin booster for any improvement in power prices.
However, the fizz flattens for 2011, where the Street prefers to be on the sidelines for now. Out of 9 analysts covering the stock, two each have revised estimates upward and downward.
Magnitude of Estimate Revisions
As a result of the analysts revising estimates over the past 30 days, the Zacks Consensus Estimate for fiscal 2010 has gone to $2.56 from $2.33.
Similarly the Zacks Consensus Estimate for fiscal 2011 has gone down a penny to $2.22 over the last 30 days, reflecting the negative bias in the estimate revisions trend on the back of the tempered outlook.
Our Recommendation
Ameren’s stable and regulated electric power operations in the Midwest market generate a relatively stable and growing earnings stream. Future growth will be guided by improved plant operations, higher rates in Missouri and Illinois, lower operations and maintenance expenses, and installation of emissions reduction equipment (scrubbers) at its generation plants.
Currently, Ameren has a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term (6+ months) Neutral recommendation.
Our cautious stance on Ameren takes into account its significant fossil fuel based generating units and uncertainty about the rate of recovery of the economy. To comply with state and federal regulations, the company has to invest a significant chunk to reduce emissions from its generation assets, including installation of selective catalytic reduction and overfire air to control nitrogen oxide emissions and the use of activated carbon injection to control mercury emissions.
While Ameren’s liquidity position is sound and growth potential is also attractive, we continue to believe that the near- to medium-term outlook for merchant power generators is tepid. Performance in the second quarter has been affected by lower power prices in the merchant power segment. In the near-term the scenario is unlikely to change and the company will resort to hedging its power prices to a greater extent.
Given these headwinds, we believe that Ameren’s current valuation adequately reflects its fairly balanced risk/reward profile. As such, we see limited upside from current levels.
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These Earnings Estimate Scorecard articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/
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