AES Corporation with Significant Earnings Per Share Improvement

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Nov 21, 2014

In this article, let's take a look at The AES Corporation (AES, Financial), a $9.93 billion market cap company that is the world's largest independent power producer.

Revenues

Looking at profitability, revenue grew by 11.13% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.67 vs $0.23). During the past fiscal year, the company turned its bottom line around by earning $0.37 versus -$1.30 in the previous year. This year, Wall Street expects an improvement in earnings ($1.28 versus $0.37).

Margins

The gross profit margin is considered relatively low, at 24.30%. It has decreased from the same quarter the previous year. However, the net profit margin of 2.12% is ranked higher than 64% of the 925 Companies in the Utilities - Diversified industry.

Profitability

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 Corporation 8.13
CPN Calpine Corp 18.29
DYN Dynegy Inc -12.07
TAC TransAlta Corp -1.48
EOC Empresa Nacional de Electricidad SA 15.31
 Industry Median 8.83

The company has a current ROE of 8.12% which is lower than the industry median but higher than Dynegy (DYN, Financial) and TransAlta (TAC, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at those levels, Empresa Nacional de Electricidad (EOC, Financial) and Calpine (CPN, Financial) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 28.4x, trading at a premium compared to an average of 20.5x for the industry. To use another metric, its price-to-book ratio of 2.27x indicates a premium versus the industry average of 1.64x while the price-to-sales ratio of 0.61x is below the industry average of 1.63x.

Price performance

The stock price has risen over the past year. As we can see in the next chart, the stock price has an volatile trend in the five-year period.

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Dividends growth

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 1.44% below the dividend yield comparable to the S&P 500. Dividends have been paid since 2012.

Final comment

The firm produces and distributes electricity in international and domestic markets, with businesses in 20 countries on five continents. 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%. Favorable tariffs in countries such as Brazil and El Salvador, and the construction of power plants in Chile, Vietnam and Jordan should boost revenues.

Hedge fund gurus like David Dreman (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Chris Davis (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned