Tag Archives: nyseaep

Attractive Valuations And Potential To Outperform Peers Are Highlights Of American Electric Power

Summary Stock should trade at a 5%-10% premium to its peers’ average forward P/E. Company’s business fundamentals remain strong and efforts to strengthen regulated operations will bode well for stock price. As AEP increases regulated operations, its cash flows will become more certain, which will support dividend growth. American Electric Power (NYSE: AEP ) has strong business fundamentals and its future financial performance is expected to be solid. The stock stays an attractive investment prospect for income-seeking investors, as it offers a solid yield of 3.9% . Moreover, the company’s future growth is expected to stay strong, which will be mainly driven by its capital spending, directed at strengthening and expanding its regulated business operations. The company’s focus on regulated business operations is gaining significant traction, and it expects to achieve long-term growth of 4%-6%. Moreover, an important decision American Electric has to make in the next 3-6 months is regarding the faith of its merchant assets; either the company will sell the assets or continue to operate them. Furthermore, the stock’s current valuations are attractive. Strong Performance and Growth Catalysts American Electric has been delivering a strong financial performance, which is expected to continue in future, mainly driven by its increased focus on regulated operations. The company reported EPS of $0.88 for 2Q2015, beating consensus of $0.81. Also, rate increases and cost control initiatives positively affected American Electric’s performance for the quarter. In 2Q2015, the company secured a $123.5 million annual revenue increase and ROE of 9.75% in West Virginia, along with a $45.4 million annual revenue increase and ROE of 10.25% in Kentucky. Given the strong performance in the first half of 2015, the company increased its mid-point of 2015 EPS guidance by 2%; increased 2015 EPS guidance from $3.4-$3.6 to $3.5-$3.65 . In recent times, the company increased its focus on regulated operations, as the performance of unregulated/merchant operations has stayed weak and volatile because of low forward power prices. The company has a robust capital spending outlook, which will fuel its revenues and earnings growth in future years; American Electric plans to incur capital spending of $12.3 billion from 2015-2017. As the company has increased its focus on strengthening its regulated operations, 96% of the planned capital spending will be allocated to regulated business. Also, the company increased its 2015 capital spending guidance from $4.4 billion to $4.6 billion ; as the company continues to make progress with its cost control measures under its continuous improvement program, it freed up an additional $200 million for capital investment for 2015. The following chart shows the breakdown of the company’s planned capital spending. (click to enlarge) Source: Investors Presentation As forward power prices remain weak and volatile, utility companies in the U.S. are taking initiatives to reduce their merchant power operations. American Electric is also considering different strategic options for its 7,900MW of competitive fleet. I think that in the next 3-6 months, the company will make a decision regarding the future of its merchant assets, as currently it waits for the PJM auction results and for the pending Ohio PPA proposal. I think the best option for the company is to sell its merchant assets, as it will allow it to completely focus on regulated operations, which will improve its revenues and cash flow stability, and will augur well for the stock valuation. Moreover, I believe the company’s merchant assets sale value could range from $2 billion to $3.2 billion, depending on the outcome of the PJM auction prices, which are expected to settle by mid-August. Also, if the company chose to sell its merchant assets, it can direct the sale proceeds to increase its planned capital spending for future years, which will have a positive impact on the stock price. Other than the robust capital spending profile, the company has been making consistent efforts to improve its credit outlook. The company has successfully managed to reduce its total debt to total capitalization ratio from 57% in 2010 to 54.3% in 2Q2015. Also, the company’s qualified pension funding stands at 101% in 2Q2015, up from 96% in 1Q2015 and 97% in 2014, as displayed below in the figures. (click to enlarge) Source: Investors Presentation Valuation and Summation The stock’s current valuation stays attractive, as it is trading at a forward P/E of 15.08x , in contrast to its peers’ average forward P/E of 15.5x. Given, the company’s solid financial performance and robust capital spending profile, which will fuel its future growth, I think the stock should trade at a 5%-10% premium to its peers’ average forward P/E. Also, the company’s business fundamentals remain strong and the company’s efforts to strengthen its regulated operation will bode well for the stock price. And if the company chose to sell its merchant assets, its business risk profile will improve, as revenues and earnings will become more stable. Moreover, as the company is increasing its regulated operations, its cash flows will become more certain, which will support its dividend growth. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Exelon Cements Credentials As A Long-Term Stock

Summary Growth investments directed at improving generational assets and growing regulated asset base will ensure rate base growth and earnings stability for the company in the long run. Recent POM acquisition approval is signaling that EXC’s regulated EPS growth will improve in coming quarters. Future cash flows remain strong due to EXC’s efforts to have a large, regulated asset base. I reiterate my bullish stance on Exelon Corporation (NYSE: EXC ); the company is making good progress on its plan to have an extended regulated asset base through acquisitions and investments. EXC’s ongoing capital investments in several infrastructure development projects will add value to shareholder wealth, which will portend well for the stock price. Moreover, the company’s nuclear operation divesture plan is still under consideration; the plan, if approved, will strengthen EXC’s competitive position in the long run. The company’s rapidly growing regulated asset base provides a foundation for stable earnings and cash flow base, which will support dividend growth in future years. EXC currently offers an attractive dividend yield of 3.9%. Attractive Long-Term Growth Path Since the start of 2015, the volatile interest rate environment has weighed on utility stocks, and the utility sector underperformed the broad market in 1H’15. Owing to improving economic conditions in the U.S., the Fed is likely to increase short-term interest rates in 2H’15, which will put pressure on the stock prices of utility companies, including EXC. Despite the fear of a rise in interest rates, I believe EXC’s performance in the coming quarters will stay strong, mainly supported by the correct strategic efforts of the company. EXC, along with other utility companies in the industry, including American Electric Power (NYSE: AEP ) and PPL Corp. (NYSE: PPL ), have a robust capital spending outlook, which will support earnings growth in the next five years. EXC is following the industry norm by making hefty growth investments and acquisitions in regulated business to secure its long-term growth. During 2014, EXC spent almost $1.78 billion on several infrastructural growth-related projects, up 46.6% year-over-year. As per its recent sustainability report, the company has invested around $3.1 billion for electric and gas utility infrastructure, which includes a $500 million investment in the installation of smart meter technology during 2015. I believe the company’s recent approach to provide safe and reliable energy is bringing convenience for customers in a way that creates value for it over the long term. Another important area of investment has been EXC’s increased focus on improving its power generation capacity through the expansion and improvement of the gas business. In this regard, the company’s previously acquired 6 natural gas power plants in Maryland have started operations from June 28. The 128MW power plants will benefit EXC by improving its natural gas production capacity in the Maryland state and will ultimately add towards its rate base growth and positively affect the stock price. Moreover, the company has recently received approval for the much-awaited PEPCO Holdings (NYSE: POM ) merger from the Delaware Public Service Commission (PSC); the $6.8 billion merger is expected to complete in 2H’15, which will strengthen the company’s regulated operations and will positively affect the stock price. The upside of this merger rests in improving the EXC business and financial risk profile, as its regulated operations will increase; the company’s management expects that the merger will add nearly 15 cents-to-20 cents to EXC’s EPS during the first full year of operation. In fact, a rate base of nearly $26 billion has been projected for the combined entity, which indicates significant upside for its future ROE and cash flows. Moving ahead, under its plan of making strategic investments in diversifying the power generation portfolio, the company is planning to spend around $16 billion over the next five years, which I believe will enhance EXC’s future financial performance. On the other side, the company’s plan to shut down its loss making, Illinois-based 6 out of 11 nuclear power plants is still on hold. Recently, five of these nuclear units have failed to clear PJM’s base residual auction; despite the inability of its nuclear units to qualify for the PJM rate base auction, analysts are hoping that EXC will generate $150 million more in capacity revenue during 2017-2018 than it would have attained if all of its capacity had cleared the auction. However, the failure to qualify for the PJM auction has strengthened the company’s case before legislatures to shut down the nuclear plants. So, either the FERC should support them or LCPS standards should be changed to support its nuclear operations. While EXC is still in talks with the FERC to lower LCPS standards, I continue to believe that the closure of nuclear power plants is positively affecting the company’s performance in the long term, and will allow the company to focus more on stable regulated operations. EXC has an attractive dividend payment plan, which is strongly backed by its healthy cash flow base. Thus far, its healthy dividend payments have earned the company a decent dividend yield of 3.9% and a modest payout ratio of 48% , which indicates that there is significant room left for further dividend hikes, if the company opts to increase the payout ratio. Given EXC’s strong commitment to having a large, regulated asset base, I continue to believe in the security and sustainability of EXC’s future cash flow base, which ensures dividend stability and dividend growth in the years ahead. I recommend investors to keep track of the upcoming 2Q’15 earnings, as the company will provide an update on its capital expenditure outlook and will discuss its plans to increase regulated operations, which could have a significant impact on the stock price. According to the company’s guidance, EXC is expected to report EPS in a range of $0.45-$0.55 for Q2’15. In contrast, analysts are anticipating EPS of $0.51 for 2Q’15. The following table shows analysts; EPS forecast for EXC’s 2Q’15. Consensus EPS Forecast Low EPS Forecast High EPS Forecast 2Q’15 $0.51 $0.48 $0.55 Source: Nasdaq.com Risks The company continues to face operational and financial risk from its nuclear energy generation assets. Moreover, uncertainty about regulatory rate approvals, changes in national energy demand, stringent environmental standards and unforeseen negative economic changes are key risks that might hamper EXC’s future stock price performance. Conclusion I am bullish on EXC and believe the company will deliver a healthy performance in the long term. The company’s growth investments directed at improving its generational assets and growing its regulated asset base will ensure rate base growth and earnings stability in the long run. Furthermore, the recent POM acquisition approval is signaling that EXC’s regulated EPS growth will improve in the coming quarters. Moreover, the company’s future cash flows remain strong due to its efforts to have a large, regulated asset base, which will support dividend growth and make dividends more stable. Analysts have also projected a healthy next five-years earnings growth of 4.9% for EXC, as shown below in the chart. Source: Nasdaq.com Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Growth And Upside Potential Highlight American Electric Power’s Bullish Credentials Going Forward

Summary Company has encouraging fundamental outlook due to increased efforts on getting a broader regulated asset base. Continuous investments in regulated operations such as transmission business give it huge opportunity for future rate base growth. AEP’s on-track cost containment plan will better its future earnings growth prospects. I have a bullish stance on American Electric Power (NYSE: AEP ); the company’s focus on getting a broader, regulated asset base and its escalated growth investments in the transmission business will better its long-term growth trajectory. In addition, the resolution of the company’s previously filled rate cases with West Virginia and Kentucky by the end of this month will strengthen its future top-line and cash flows. Owing to the attractive outlook of AEP’s future cash flows, I believe its dividend payment will remain attractive for investors. Moreover, the company’s on-track cost savings plan, “Lean deployment”, will continue improving its bottom-line. Furthermore, my price target calculation suggests a potential upside of approximately 25% for AEP. AEP’s Strategic Growth Drivers Remain Intact In the recent past, increased focus on infrastructure development investment by utilities has been positively affecting the industry fundamentals and performance. For 1Q’15, the earnings growth of the U.S. Utility Industry was 8.4% , well above the S&P-500’s growth of only 2.4% year-on-year. As far as AEP is concerned, the company has made great strides in becoming a high-quality regulated utility, with improved execution and better management of its intelligent strategic growth efforts. One of the most important strategic growth drivers, increased focus on regulated asset base, has been helping its financials grow at a decent pace. In fact, AEP’s management has reiterated their intentions to sell the company’s unregulated business under its plan of growing its regulated utility business; the decision is on hold until state regulators make a final decision about the company’s proposal regarding state subsidized purchase power agreement that will help it maintain 3,100MW of coal-fired capacity. AEP has requested regulators make the final decision regarding this matter, at least by October ’15. The prevailing uncertainty around the acceptance of the PPA agreement and the recent industry merchant divestitures make me believe that the company will either sell or spinoff its Ohio-based power generating subsidiary and the proceeds from the sale would be reinvested to support its growth-generating regulated transmission business. In fact, one of its former competitors, Dynegy, is interested in buying AEP’s unregulated assets. Since the transmission business is one of the most promising businesses of AEP, I believe reinvesting cash proceeds from the unregulated business sale in the transmission business will strengthen its long-term growth potentials. Moreover, the sale of Ohio plants (unregulated assets) will support its strategic move, which is away from de-regulated operations to regulated ones. In fact, the company has several multibillion-dollar projects in place for the next five-to-ten years, in order to grow its regulated asset base by improving the operational performance of its transmission business. Currently, AEP stands tall in the U.S. utility business with its major stake in several advanced transmission projects, and moving ahead, further increases in transmission project-related investments will improve its fundamentals. As part of its long-term growth plan, AEP has announced hefty investment of almost $4.8 billion in transmission projects from 2015 to 2017; I believe that these up-scaled investments in the transmission business will help the company’s rate base expand, which will increase its future cash flows and ROE. Moreover, increase in its earned returns will better AEP’s EPS growth. Furthermore, the company’s previously filed rate cases in West Virginia and Kentucky are expected to gain approval at the end of this month. AEP has requested a $227 million rate increase in West Virginia and a $70 million rate increase in Kentucky, which will allegedly go into effect on 1st July 2015. I believe that these recent rate hikes will portend well for raising the level of earned returns for the company and will add towards the certainty of its cash flow base success in the years ahead. On the bottom-line, AEP’s multi-year cost saving plan “Lean deployment” is working really well to get it a leaner cost base. Thus far, the company has completed the implementation of lean deployment at 13 distribution districts, whereas work at almost 19 more is still in process. Moreover, on the transmission business side, AEP has completed work on just one area and four more are scheduled for completion, this year. Given the fact that the implementation of lean deployment is keeping the company’s operational and management (O&M) expense down, I believe with the ongoing execution, cost efficiency gains from the lean deployment plan will keep on improving AEP’s earnings growth level. Safe & Sustainable Returns AEP’s strong growth prospects have been helping its cash flows grow and support its management’s dividend policy. With the increasingly healthy cash payments under its attractive dividend payment policy, the company has earned a strong five-year dividend growth rate of around 4.87%. Keeping track of its attractive dividend payment plan, AEP had recently announced another quarterly dividend payment of $0.53 , which translates into a dividend yield of 3.95% . Given the company’s strong strategic growth prospects and due to its management’s strong commitment towards paying healthy dividend payments, I believe AEP will have cash flows available to make and increase dividends in the years ahead. Guidance The company’s management has reaffirmed its guidance for 2015. AEP expects full year 2015 EPS to be in a range of $3.40-to-$3.60 . Also, it has maintained its stance about achieving long-term earnings growth in a range of 4%-to-6%. Thus far, the company has done pretty well in achieving allowed ROEs at its regulated subsidiaries; I believe its correct growth efforts and cost controls will help AEP achieve its anticipated 4%-to-6% growth rate in the years ahead. Risks The company’s future growth prospects will continue to face the risk of potential negative regulatory restrictions in its service territory. In addition, AEP’s inability to pull off well-timed, constructive regulatory rate base approvals by negotiating with FERC might pressurize its future growth prospects. Moreover, the company’s ongoing and planned development plans, if not properly executed, might burden its bottom-line with cost overruns. Furthermore, unfavorable temperature trends, environmental regulations and unforeseen negative economic changes are key risks hovering over its stock price performance. Price Target I reiterate my previously calculated price target of $69 for AEP, which was calculated using a dividend discounting method. In my price target calculations, I used cost of equity of 6% and nominal growth rate of 3%. Based on my price target, the stock offers potential price appreciation of 25%. Conclusion The company has an encouraging fundamental outlook due to its increased efforts on getting a broader regulated asset base. In fact, continuous investments in regulated operations such as the transmission business give it a huge opportunity for future rate base growth, which increases certainty about its future cash flows and earnings base. Moreover, the company’s on-track cost containment plan will better its future earnings growth prospects. As a matter of fact, the healthy future earnings growth will strengthen its cash flows, which will support its dividends. Furthermore, my price target calculations suggest a potential upside of approximately 25% for the stock. Analysts have also anticipated a healthy next five-years growth rate of 4.92% for AEP. Due to the aforementioned factors, I am bullish on AEP. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.