We have reaffirmed our Neutral recommendation on
The AES Corporation
) on Jan 10, 2013, given its business exposure around the globe,
which insulates it from any region-specific risk. However, on the
flip side, focus on long-term supply contracts exposes the
company to commodity price risks rendering it incapable of
passing 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
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.
AES Corporation's businesses encompass 27 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. This also insulates the company
from specific risks in any single region or country.
The company is also investing a substantial portion 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 67.6% at the
end of the first nine months of 2012. The company closed the
first nine months of 2012 with cash and cash equivalents of $1.9
billion. The company continues to be a strong cash generator,
having generated operating cash flows of approximately $2.9
billion in 2011. We expect AES Corporation's strong liquidity to
stand in good stead for earnings accretive acquisitions,
investments for organic growth, and its ongoing share buyback
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. Thus, the company is compelled to invest in
renewable energy to meet stringent regulation standards. The
company is also rapidly increasing its generation capacity and
significantly focusing on fossil fuel plants. However coal prices
are on the rise because of increasing demand in the emerging
economies apart from higher demand 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.
Following the release of the third quarter results, the Zacks
Consensus Estimate for both 2012 and 2013 remained flat at $2.73
and $3.37 per share, respectively. Also, following the third
quarter earnings release, analysts apprehending a continuing
trend of flat demand, weak prices and sluggish economic recovery
remained on the sidelines. This is substantiated by the fact that
over the past 60 days, the Zacks Consensus Estimates for both
fourth quarter 2012 and full-year 2013 fell by 2 cents and 3
cents, respectively. The Zacks Consensus Estimates for fourth
quarter 2012 and full-year 2013 currently stand at 30 cents and
$1.22, respectively. As a result, the company now has a Zacks
Rank #4 (Sell).
Other Stocks to Consider
While we prefer to remain on the sidelines for AES
Corporation, there are other stocks in the sector that appear
rewarding. These include
Huaneng Power International, Inc.
), which are expected to perform impressively over the next few
months and accordingly carry a Zacks Rank #1 (Strong Buy).
AMEREN CORP (AEE): Free Stock Analysis Report
AES CORP (AES): Free Stock Analysis Report
HUANENG POWER (HNP): Free Stock Analysis
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