We reaffirmed our long-term Neutral recommendation on
The AES Corporation
) on Mar 28, 2013. The reiteration was backed by its impressive
fourth quarter 2012 results and a global presence. However, these
positives are somewhat tempered by commodity price risks faced by
the company due to its focus on long-term supply contracts.
AES CORP (AES): Free Stock Analysis Report
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EDISON INTL (EIX): Free Stock Analysis Report
HUANENG POWER (HNP): Free Stock Analysis
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Why Kept Neutral?
On Feb 27, AES Corporation − a power company engaged in
electricity generation and distribution businesses − reported
impressive fourth quarter 2012 results. Its quarterly earnings
beat the Zacks Consensus Estimate by 6.7% as well as exceeded the
year-ago earnings by a considerable 60%. The uptrend came on the
back of benefits accrued from asset sale, lower costs and
positive returns from the company's generation business.
AES Corporation operates in 27 countries worldwide and has a
highly-diversified earnings base. The company is well positioned
to capitalize on the regional discrepancies in power prices and
weather-related demand owing to its varied target markets. This
provides a shield to the company from region-specific risks.
Again, AES Corporation's large presence in the developing markets
of Asia and Latin America puts it in a profitable position
compared to its North America-focused peers. Steady economic
growth and power demand in the emerging markets offset to a great
extent the erosion in profitability in North America.
We believe the company's several ventures like the conclusion of
the 447 megawatt ("MW") of installed capacity in 2012 which
includes the big-time 326 MW gas-fired Trinidad Unit 2, 121 MW of
wind as well as various hydroelectric projects will offer
encouraging growth prospects in the near term.
On the flipside, AES Corporation's focus on long-term supply
contracts exposes it to commodity price risk. The company would
be unable to pass on any escalation in prices of coal and natural
gas to its customers.
Also, 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, as it typically enters into long-term delivery contracts
for utility projects.
Other Stocks to Consider
AES Corporation currently retains a Zacks Rank #2 (Buy). There
are other companies in the sector that appear more promising.
Huaneng Power International, Inc.
Brookfield Infrastructure Partners L.P.
), all of which carry a Zacks Rank #1 (Strong Buy).