In this article, let's take a look at The AES Corporation (AES, Financial), the world's largest independent power producer, which produces and distributes electricity in international and domestic markets.
Diversification
The company has a good presence in key markets where demand for electricity is expected to grow in the future and sold $1.5 billion of businesses with limited growth potential. The company has organized itself into 6 geographically aligned strategic business units and there are two lines of business, generation and utilities.
AES has utility and generation assets in 20 countries. Geographically, revenues come from U.S. (23% of 2013 revenues), Brazil (32%), Chile (10%), El Salvador (5%) and Dominican Republic (5%). The remaining countries made up the other 25%. This diversification reduces country- and region-specific risk.
For this year is expected operations for the South America Strategic Business Units, or SBUs, to provide a little more than a third of adjusted pre-tax contribution to earnings; Mexico, Central America and the Caribbean about 20%; Europe, the Middle East and Africa (EMEA) 18%; and Asia about 7%. For the U.S., it is expected 19%.
Growth Strategies
The global strategy focuses on large-scale projects. The company focuses to improve profitability, and in that way it concentrates on mergers and acquisitions, as well as exploring opportunities in the climate change business, such as the production of greenhouse gas reduction activities. On the local level, AES ´s plan is to expand itself focusing on constructing new power plants.
Dividends in the Next Years
AES has reinstated the commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. In January 2014, it increased the dividend to an annual rate of $0.20 per share from $0.15 per share. The current dividend yield is 1.5% and efforts would be made to provide a dividend yield comparable to the S&P 500 (about 2%).
Revenues, Margins and Profitability
Looking at profitability, the revenue growth (2.69%) has outpaced the industry average. Earnings per share declined in the most recent quarter compared to the same quarter a year ago. However, I think this is not a long-term downtrend. During the past fiscal year, AES turned its bottom line around by earning $0.39 versus -$1.30 in the prior year. For this year, the market expects an improvement in earnings ($1.33 versus $0.39). The firm´s annual EPS growth target is 4%-6% during the next five years.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| AES | AES Corp. | 2.63 |
| DUK | Duke Energy Corporation | 6.45 |
| EIX | Edison International | 10.21 |
| Industry Median | 8.22 |
The company has a current ROE ratio of 2.63% which is lower than its peers and the industry median. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 2.6x trading at a premium versus the industry average of 1.56x while the price-to-sales ratio of 0.71x is below the industry average of 1.56x.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $14.111, that is an 7.1% compound annual growth rate (CAGR).
Final Comment
Despite the company faces regulatory, political and economic uncertainty in various markets, a higher interest rate environment and an unfavorable commodity price trend, the company´s projects that are projected to provide returns above the cost of capital.
Hedge fund gurus like Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), David Dreman (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios.
Disclosure: Omar Venerio holds no position in any stocks mentioned
