Earnings Beat for AES Corp, Sales Lag

The AES Corp. (AES) reported third quarter 2013 adjusted earnings per share of 39 cents, above the Zacks Consensus Estimate of 34 cents. Adjusted earnings for the reported quarter also increased approximately 11.4% from the year-ago figure of 35 cents.

The results were driven by a lower effective tax rate, operational improvements and the impact of debt repayment and share repurchases, partially offset by dry hydrological conditions in Latin America and a weaker Brazilian Real.

Diluted earnings per share from continuing operations were 17 cents versus a loss of $2.12 per share due to lower impairment expense.

Operating Highlights

In the reported quarter, revenues were $4,003.0 million, missing the Zacks Consensus Estimate of $5,053.0 million by 20.8%. It also declined 8.1% year over year.

The results reflect a decline in year-over-year sales in the U.S. Andes, Brazil and Asia. These declines were partially offset by higher sales in Mexico, Central America and the Caribbean (:MCAC) and Europe, Middle East and Africa (:EMEA).

In the reported quarter, total cost of sales was $3,066.0 million, down 9.5% year over year. General and administrative expenses were $63.0 million, down 1.5% year over year.

Business Highlights

The company recently made three new asset sale transactions for approximately $236.0 million. In Sep 2013, the company agreed to sell its SONEL power distribution business and Dibamba and Kribi generation facilities in Cameroon. In Oct 2013, the company signed an agreement to sell its 39 MW wind generation business in Gujarat, India. In Nov 2013, the company signed an agreement to sell its wind development pipeline in Poland.

On the construction front, the company is scheduled to complete 2,231 MW of capacity by 2016. In Sep 2013, the company brought into service 40 MW of energy storage resource in Ohio.

Financial Condition

AES Corp. reported cash and cash equivalents of $2,031.0 million as of Sep 30, 2013 versus $1,909.0 million as of Dec 31, 2012. Non-recourse debt was $12,981.0 million versus $12,286.0 million as of Dec 31, 2012.

Consolidated operating cash flow was $855.0 million, down from $1,015.0 million in the year-ago period. Capital expenditures during the quarter were $464 million versus $510.0 million a year ago.

Along with its earnings release, the company increased its first quarter 2014 dividend by 25.0% to 5 cents per share that amounts to an annual dividend of 20 cents per share.

Guidance

AES Corp. reaffirmed its adjusted earnings guidance for 2013 in the range of $1.24 to $1.32 per share. Proportionate free cash flow is estimated at the high end of the range of $750.0 million to $1,050.0 million in 2013. Cash flow from operating activities for 2013 is projected between $2,500.0 million and $3,100.0 million.

The company increased its cumulative annual cost savings target to $200.0 million by 2015. The company’s prior target of annual cost savings was $145.0 million by 2014. It expects to achieve $135.0 million in 2013 and the remainder in 2014. It expects incremental savings of $55 million on a ratable basis over 2014 and 2015.

The company also reaffirmed its total return target of 6%–8% through 2015, which includes adjusted EPS growth of 4%–6% and a dividend yield of 1%–2%.

Peer Reviews

Edison International’s (EIX) adjusted earnings of $1.42 per share for the third quarter of 2013 were well ahead of the Zacks Consensus Estimate of $1.21 by 17.4% and the year-ago quarterly earnings of $1.00 by 42.0%. The upside was driven by robust cost management initiatives along with favorable tax benefits.

American Electric Power Company Inc. (AEP) reported third quarter 2013 operating earnings of $1.10 per share, beating the Zacks Consensus Estimate of $1.08 by 1.9%. The quarterly figure also improved 7.8% from the year-ago profit of $1.02. This improved performance reflects positive returns from the investments made in the company’s regulated operations.

Our Take

Though the top line failed to beat the Zacks Consensus Estimate, the bottom line easily surpassed our expectation. The results reflect cost control initiatives taken by the company.

AES Corp. is working on its existing projects as well as on new growth projects to overcome its risk exposure, lower capital requirements, leverage strategic relationships and maximize its return. The company continues to exit markets and businesses where it does not have and cannot develop a compelling competitive advantage.

However, we are wary of the high capital expenditure that the company would need to incur for the installation of more clean energy generating plants. Also, long-term supply contracts expose the company to commodity price risk. AES Corp. currently retains a Zacks Rank #3 (Hold). In the near term, we would advise investors to accumulate its short-term Zacks Rank #1 (Strong Buy) peer UNS Energy Corp. (UNS).

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