Unraveling The AES Corp (AES)'s Potential Underperformance: A Deep Dive into Key Metrics
Long-established in the Utilities - Regulated industry, The AES Corp (NYSE:AES) has enjoyed a stellar reputation. However, it has recently witnessed a daily loss of 0.24%, juxtaposed with a three-month change of -40.46%. Fresh insights from the GF Score hint at potential headwinds. Notably, its diminished rankings in financial strength, growth, and valuation suggest that the company might not live up to its historical performance. Join us as we dive deep into these pivotal metrics to unravel the evolving narrative of The AES Corp.
What Is the GF Score?
The GF Score is a stock performance ranking system developed by GuruFocus using five aspects of valuation, which has been found to be closely correlated to the long-term performances of stocks by backtesting from 2006 to 2021. The stocks with a higher GF Score generally generate higher returns than those with a lower GF Score. Therefore, when picking stocks, investors should invest in companies with high GF Scores. The GF Score ranges from 0 to 100, with 100 as the highest rank.
Financial strength rank: 3/10
Profitability rank: 6/10
Growth rank: 4/10
GF Value rank: 8/10
Momentum rank: 2/10
Based on the above method, GuruFocus assigned The AES Corp the GF Score of 66 out of 100, which signals poor future outperformance potential.
Understanding The AES Corp Business
The AES Corp, with a market cap of $8.32 billion and sales of $12.95 billion, operates in the global power industry. As of year-end 2022, its generation portfolio consists of over 32 gigawatts of generation including renewable energy (46%), gas (32%), coal (20%), and oil (2%). The company owns and operates six electric utilities, distributing power to 2.6 million customers. With an operating margin of 17.97%, the company's financial performance is a key area of interest for investors.
Financial Strength Breakdown
The AES Corp's financial strength indicators present some concerning insights about the company's balance sheet health. The company has an interest coverage ratio of 1.91, which positions it worse than 79.49% of 429 companies in the Utilities - Regulated industry. This ratio highlights potential challenges the company might face when handling its interest expenses on outstanding debt. It's worth noting that the esteemed investor Benjamin Graham typically favored companies with an interest coverage ratio of at least five.
The company's Altman Z-Scoreis just 0.48, which is below the distress zone of 1.81. This suggests that the company may face financial distress over the next few years. Additionally, the company's low cash-to-debt ratio at 0.08 indicates a struggle in handling existing debt levels. The company's debt-to-equity ratio is 10.65, which is worse than 98.67% of 452 companies in the Utilities - Regulated industry. A high debt-to-equity ratio suggests over-reliance on borrowing and vulnerability to market fluctuations. Additionally, the company's debt-to-Ebitda ratio is 11.62, which is above Joel Tillinghast's warning level of 4 and is worse than 91.38% of 441 companies in the Utilities - Regulated industry. Tillinghast said in his book Big Money Think's Small: Biases, Blind Spots, and Smarter Investing that a high debt-to-Ebitda ratio can be a red flag unless tangible assets cover the debt.
Growth Prospects
A lack of significant growth is another area where The AES Corp seems to falter, as evidenced by the company's low Growth rank. Over the past five years, The AES Corp has witnessed a decline in its earnings before interest, taxes, depreciation, and amortization (EBITDA). The three-year growth rate is recorded at -13.6, while the five-year growth rate is at -18.1. These figures underscore potential challenges in the company's profitability. Lastly, The AES Corp predictability rank is just one star out of five, adding to investor uncertainty regarding revenue and earnings consistency.
Next Steps
Given the company's financial strength, profitability, and growth metrics, the GF Score highlights the firm's unparalleled position for potential underperformance. While the company has a strong reputation in the Utilities - Regulated industry, its recent performance and financial indicators suggest that it may struggle to maintain its historical performance. Investors should consider these factors when making investment decisions.
GuruFocus Premium members can find more companies with strong GF Scores using the following screener link: GF Score Screen
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
This article first appeared on GuruFocus.
