Tag Archives: aep

Attractive Valuations And Potential To Outperform Peers Are Highlights Of American Electric Power

Summary Stock should trade at a 5%-10% premium to its peers’ average forward P/E. Company’s business fundamentals remain strong and efforts to strengthen regulated operations will bode well for stock price. As AEP increases regulated operations, its cash flows will become more certain, which will support dividend growth. American Electric Power (NYSE: AEP ) has strong business fundamentals and its future financial performance is expected to be solid. The stock stays an attractive investment prospect for income-seeking investors, as it offers a solid yield of 3.9% . Moreover, the company’s future growth is expected to stay strong, which will be mainly driven by its capital spending, directed at strengthening and expanding its regulated business operations. The company’s focus on regulated business operations is gaining significant traction, and it expects to achieve long-term growth of 4%-6%. Moreover, an important decision American Electric has to make in the next 3-6 months is regarding the faith of its merchant assets; either the company will sell the assets or continue to operate them. Furthermore, the stock’s current valuations are attractive. Strong Performance and Growth Catalysts American Electric has been delivering a strong financial performance, which is expected to continue in future, mainly driven by its increased focus on regulated operations. The company reported EPS of $0.88 for 2Q2015, beating consensus of $0.81. Also, rate increases and cost control initiatives positively affected American Electric’s performance for the quarter. In 2Q2015, the company secured a $123.5 million annual revenue increase and ROE of 9.75% in West Virginia, along with a $45.4 million annual revenue increase and ROE of 10.25% in Kentucky. Given the strong performance in the first half of 2015, the company increased its mid-point of 2015 EPS guidance by 2%; increased 2015 EPS guidance from $3.4-$3.6 to $3.5-$3.65 . In recent times, the company increased its focus on regulated operations, as the performance of unregulated/merchant operations has stayed weak and volatile because of low forward power prices. The company has a robust capital spending outlook, which will fuel its revenues and earnings growth in future years; American Electric plans to incur capital spending of $12.3 billion from 2015-2017. As the company has increased its focus on strengthening its regulated operations, 96% of the planned capital spending will be allocated to regulated business. Also, the company increased its 2015 capital spending guidance from $4.4 billion to $4.6 billion ; as the company continues to make progress with its cost control measures under its continuous improvement program, it freed up an additional $200 million for capital investment for 2015. The following chart shows the breakdown of the company’s planned capital spending. (click to enlarge) Source: Investors Presentation As forward power prices remain weak and volatile, utility companies in the U.S. are taking initiatives to reduce their merchant power operations. American Electric is also considering different strategic options for its 7,900MW of competitive fleet. I think that in the next 3-6 months, the company will make a decision regarding the future of its merchant assets, as currently it waits for the PJM auction results and for the pending Ohio PPA proposal. I think the best option for the company is to sell its merchant assets, as it will allow it to completely focus on regulated operations, which will improve its revenues and cash flow stability, and will augur well for the stock valuation. Moreover, I believe the company’s merchant assets sale value could range from $2 billion to $3.2 billion, depending on the outcome of the PJM auction prices, which are expected to settle by mid-August. Also, if the company chose to sell its merchant assets, it can direct the sale proceeds to increase its planned capital spending for future years, which will have a positive impact on the stock price. Other than the robust capital spending profile, the company has been making consistent efforts to improve its credit outlook. The company has successfully managed to reduce its total debt to total capitalization ratio from 57% in 2010 to 54.3% in 2Q2015. Also, the company’s qualified pension funding stands at 101% in 2Q2015, up from 96% in 1Q2015 and 97% in 2014, as displayed below in the figures. (click to enlarge) Source: Investors Presentation Valuation and Summation The stock’s current valuation stays attractive, as it is trading at a forward P/E of 15.08x , in contrast to its peers’ average forward P/E of 15.5x. Given, the company’s solid financial performance and robust capital spending profile, which will fuel its future growth, I think the stock should trade at a 5%-10% premium to its peers’ average forward P/E. Also, the company’s business fundamentals remain strong and the company’s efforts to strengthen its regulated operation will bode well for the stock price. And if the company chose to sell its merchant assets, its business risk profile will improve, as revenues and earnings will become more stable. Moreover, as the company is increasing its regulated operations, its cash flows will become more certain, which will support its dividend growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

American Electric Earns Bullish Thesis With Its Solid Growth Prospects

Summary Company making correct decisions to grow regulated operations. Regulated operations will provide sales, earnings and dividend stability. Aggressive capital expenditures will fuel AEP’s earnings growth in future. I reiterate my bullish thesis on American Electric Power (NYSE: AEP ); the company’s strategic growth plan focused on broadening and improving its regulated asset base will help it better its sales and attain a sustainable cash flow base through a decent increase in its rate base. As part of its long-term growth plan, the company is working to improve its competitive business results, and it will be making aggressive investments in transmission operations, which will portend well for both AEP’s top-line and bottom-line numbers. As regulated operations will gather more cash flow stability for the company, AEP will continue to reward its shareholders through dividends. Moreover, the company’s cost saving plan will positively affect its bottom-line numbers. The stock offers a potential price appreciation of 8.3%, as per my price target calculations, shown below. AEP Making Right Moves to Excel in Long Term 2014 was a good year for AEP; the stock is up approximately 35% in the last 12 months. The company’s performance has been positively affected by the low yield environment and improving demand from industrial and consumer segments. The company’s increased dependence on regulated operations has been helping it exploit the industry’s growth prospects. AEP’s strategic growth formula is centered on generating sales growth through increased capital expenditures for the infrastructure development of transmission business. The company has laid out its plan to make an investment of around $4.8 billion towards the betterment of its transmission business over the next three years. Owing to its large scale capital expenditure plan for regulated operations, especially for the transmission business, I believe the company’s regulated rate base will grow at a decent pace, delivering significant upside to its top-line numbers. The following chart shows AEP’s expected regulated rate base growth for upcoming years. Source: Power&RenewableInsights.com Along with the transmission infrastructure growth expenditures, the company is also looking at all possible options to better the results of its competitive business. AEP has made an announcement that Goldman Sachs will assist in improving and exploring the options of its competitive business operations. As utility companies like Duke Energy (NYSE: DUK ) are shedding their competitive operations , I believe AEP will also consider the option of selling its competitive energy assets to address the prevailing challenges and increase its focus on regulated asset base. Moreover, if the company opts to sell its competitive operations, the sales proceeds of competitive assets could be approximately $2.8-$3.6 billion . In addition, AEP has been actively pursuing its cost reduction plan, the “lean deployment” plan, to reduce its expense burden and support its future profitability. The plan has been rolled out to 13 distribution districts and 13 more districts are under review in order to deliver the management’s anticipated cost savings of $100-$200 million from the lean deployment plan by the end of 2016. In fact, the cost saving plan will grow the company’s bottom-line trajectory and will add towards its EPS growth. AEP have reiterated its earnings guidance for 2015 in its recent 4Q14 earnings conference call; the company expects its earnings to grow in a range of $3.40-$3.60 per share. Owing to its ramped up efforts to grow regulated rate base and healthy cost saving initiatives, I believe AEP will be able to grow its earnings at a decent base. Analysts are also anticipating that the company will deliver a healthy next five-year earnings growth rate of approximately 4.92% . Financial Performance The company recently reported 4Q’14 operating EPS of $0.48 , down from $0.60 per share in 4Q’13. The company’s quarterly earnings were negatively affected by its plan to speed up its capital expenditures and shift its O&M expenditures from 2015 and 2016, to 2014. The company’s decision to shift the future expenses to 2014, have improved earnings visibility and will positively affect its future earnings growth rate. Despite soft earnings for 4Q’14, the company reported an operating EPS of $3.43 for full year 2014, up 6% year-on-year. Investors Remain Rewarded AEP has a strong history of rewarding its shareholders through healthy dividends. The stock currently offers a safe dividend yield of 3.35% . The company’s healthy cash flow base has been supporting its hefty dividend payments and its current payout ratio of 55% indicates that AEP can increase its payout ratio to increase dividends in upcoming years. Keeping track of its impressive dividend payment policy, the company recently announced a quarterly dividend payment of 53 cents , an increase of 6%, year-over-year. Owing to AEP’s increased focus on regulated operations, I believe the company will attain more cash flow stability in the years ahead, ensuring the stability and security of its long-term dividend payment plan. The following table shows the dividend per share and dividend payout of AEP from 2012-2014, and includes figures for 2015, based on my estimates. 2012 2013 2014 2015(NYSE: E ) Dividend Per Share (In-$) $1.88 $1.95 $2.02 $2.10 Dividend Payout Ratio (In-%) 61% 60% 57% 61% Source: Company’s Yearly Earnings Reports & Equity Watch Estimates Risks Despite the company’s sturdy growth efforts, strict environmental regulations from authorities will remain an overhang on its future stock price performance. Since AEP has been making huge investments to develop its transmission infrastructure, I believe future capital expenditures could weigh on its cash flows. Price Target I have calculated a price target of $69 for AEP through a dividend discount model. In my price target calculations, I have used cost of equity of 6% and nominal growth rate of 3%. The stock offers an upside price potential of approximately 8.3%, as per my price target calculations, shown below. 2015 2016 2017 Terminal Value Dividend Per Share (In-$) 2.10 2.12 2.20 75.53 Present Value of Dividend Per Share (In-$) 1.98 1.88 1.85 63.45 Source: Equity Watch Calculations & Estimates Total Present Value of Dividend per Share = Price Target = $1.98 + $1.88 + $1.85 + $63.45 = $69/share Conclusion The company has been delivering a healthy financial performance in the recent past. The company has been making the correct decisions to grow its regulated operations, which will improve its financial performance. Also, regulated operations will provide sales, earnings and dividend stability. The company’s aggressive capital expenditures will fuel its earnings growth in the future. The stock offers a safe dividend yield of 3.35%, which makes it a good investment option for dividend-seeking investors. The stock also offers a potential price appreciation of 8.3%, based on my price target. Due to the aforementioned factors, I am bullish on AEP. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.