AES Corp. (AES) is by far the cheapest member of the Dow Jones Utility Average, with a p/e based on trailing 12-months earnings of only 9.9, and 8.7 times expected 2018 results, respectively, notes Roger Conrad, editor of Conrad's Utility Investor.
Comparable figures for the Dow Utility Average are 19.1 and 18.7 times. The dividend is also nearly 5 percent, well above the DJUA’s 3.3 percent. That’s despite a superior rate of growth: The company boosted its payout by 8.3 percent in mid-December.
Investors haven’t had any trouble recently buying below our buy target of $15. The last time the stock approached that level was in late 2014. We believe AES’ steep discount to its sector will narrow sharply in 2018, igniting powerful gains even as higher priced utilities tread water at best.
The primary reasons for the discount are investor concerns about near-term challenges facing the company, including completing a power plant in Chile that forced management to fire the lead contractor, regulatory uncertainty in Ohio and exposure to economic and political turbulence in Brazil.
That’s caused many investors to pay short shrift to AES’ progress executing a multi-year plan to reduce operating costs and risk, boost its balance sheet to investment grade metrics and invest heavily in new energy.
The sale of the company’s Philippines business announced in December advances all three goals, with management stating the $1.05 billion in proceeds will allow it to “achieve investment grade metrics” in 2019, one year earlier than previous guidance.
During President Trump’s tour of Asia this year, AES signed a letter of intent to build a 2,250-megawatt power station and LNG (liquefied natural gas) import terminal in Vietnam. The project would provide 5 percent of the country’s energy needs.
Ultimately, the surest catalyst for a higher share price is simply AES executing on its growth plans in 2018.
But we also look for progress on the Chilean plant, resolution of uncertainty at the DP&L unit in Ohio (now on S&P watch positive) and better conditions in Brazil to salve investors’ current concerns and set the stage for a market beating run in the next year. Buy up to 15.
