We reaffirmed our long-term Neutral recommendation on The AES Corporation (AES) 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.
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. These include Huaneng Power International, Inc. (HNP), Edison International (EIX) and Brookfield Infrastructure Partners L.P. (BIP), all of which carry a Zacks Rank #1 (Strong Buy).
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