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AES Corp's (AES) Focus on Financial Flexibility Bodes Well

Zacks Equity Research

The AES Corporation’s AES withdrawal of operations from risky markets is a prudent step. Its growing partnerships and focus on renewables are expected to be growth catalysts.

The Zacks Consensus Estimate for the company’s 2020 earnings is pegged at $1.44 per share on revenues of $10.70 billion. The bottom-line figure suggests 5.9% year-over-year increase. The same for the top line calls for a 5% rise on a year-on-year basis.

What’s Driving the Stock?

The company is rapidly expanding its renewable footprint, both in the domestic front and the overseas markets. It has signed 2,800 MW of renewable contracts in 2019, increasing its backlog to 6,145 MW. This includes 3,009 MW under construction, with the expectation of commencing operations through 2021 as well as 3,136 MW of renewables signed under long-term Power Purchase Agreements (PPAs) as of Dec 31, 2019. Such developments should fortify the company’s position in the global renewables space.

AES Corp. is streamlining its portfolio through asset divestments to exit risky markets and businesses. In line with this, the company agreed to sell its businesses in Jordan and Northern Ireland for $211 million in April 2019.

AES Corp is focused on preserving its financial flexibility by reducing costs. These initiatives will include overhead reductions, procurement efficiencies and operational improvements. Since 2012, AES Corp. achieved $300 million in cost savings and revenue enhancements. In 2019, the company announced its target of additional annual cost savings worth $100 million, driven by digital initiatives that include utilizing data and technology for maintenance, outage prevention, inspection as well as procurement. The company expects to achieve this target by 2022.

However, risk of unfavorable economic conditions in Brazil, commodity price volatility, stringent environmental regulations and political and operational risks are persistent challenges.

Zacks Rank & Price Performance

The stock carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 12 months, shares of the company have lost 35.2% compared with the industry’s decline of 3.4%.

Stocks to Consider

Few better-ranked stocks from the same industry are Pacific Gas & Electric Co. PCG, NorthWestern Corporation NWE and Duke Energy Corporation DUK. NorthWestern sports a Zacks Rank #1, while NorthWestern and Duke Energy hold a Zacks Rank #2 (Buy).

Long-term earnings growth of Pacific Gas & Electric, NorthWestern and Duke Energy is pegged at 2.50%, 3.10% and 4.70%, respectively.

Pacific Gas & Electric, NorthWestern and Duke Energy have trailing four-quarter positive earnings surprise of 7.35%, 7.62% and 6.53%, on average, respectively.

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