The S&P 500 has now rallied to all-time highs, as President Biden unveiled a plan of more than $2 trillion dollars to modernize U.S. infrastructure. In this plan Biden focused on boosting clean energy, rather than traditional energy sources that have negative impacts for the environment.
As a result, the SPDR S&P Kensho Clean Power ETF (CNRG) rallied more than 7% in just the past 5 days. A major holding within CNRG is AES Corp. (AES), a leading and diversified producer and distributor of electricity in the U.S. and Latin America, with a firm vision for a net-zero carbon future.
AES is well-positioned to benefit from the global green transition towards a more sustainable power generation mix. With strong renewable opportunities in Latin America, a dominant natural gas storage position in the Dominican Republic, above average industry earnings per share (EPS) and free cash flow (FCF) growth of 7-9% through 2025, AES should deliver superior results to its shareholders in the foreseeable future.
The company has a robust backlog of projects under construction or undersigned power purchase agreements (PPA) which will continue to increase AES’ market share globally. Besides, AES engaged in various partnerships with Fluence, Uplight, Motor and 5B, expected to significantly boost its equity value creation.
While AES’ core business, U.S. Utilities, provide a stable source of cash flow, investors should not disregard the updated guidance announced in March Investor Presentation accelerating the annual target of new renewable contracts, to 3-4 GWs in 2021 (initially 2-3 GWs) and to 4-5 GWs in 2025.
Earnings came in-line with expectations in the 4Q2020. AES’ revenue advanced 5.3% to $2.56 billion quarter-on-quarter and net income jumped more than two-fold, from $481 million loss to a gain of $401 million, related primarily to the absence of asset impairments during the period.
From an annual stance, revenues in 2020 declined 5.2% to $9.66 billion, while net income slid 84.8% to $46 million, following an $864 million asset impairment triggered by the reduction of AES’ coal-fired power generation to 25% of total generation.
Free cash flow jumped 17.7% to $855 million over the year 2020, subsequent to the deceleration of capital expenditure, down 20.9% to $1.9 billion. Net debt decreased slightly year-on-year, down 1.8% to $18.8 billion, but debt remains high in the context of rising U.S. 10-year yields. Yet, AES had a comfortable cash position of $1 billion at the end of the year 2020 and the leverage ratio of 5.23x is slightly below the industry average (5.6x).
AES remains undervalued compared to its peers
AES is well-positioned to benefit from rapid growth demand in renewables and energy storage. After advancing 17.3% in 2020, AES’s uptrend continues, gaining more than 15% year-to-date. Analysts tracking the stock remain bullish on the dossier, with 8 out of 10 analysts having a constructive view on AES.
In terms of value, AES trades at a discount compared to the industry average. With 2021 expected EV/EBITDA of 10.2x and 2021 expected P/E of 17.6x, AES looks undervalued compared to its peers, DTE Energy (DTE), Duke Energy (DUK) and NextEra Energy (NEE), trading respectively at 18.6x, 18.4x and 29.2x, expected 2021 P/E.
With a robust backlog of projects expected to come online this year (4GW to be completed in 2021), strong partnerships in innovative clean energy solutions and discounted values compared to its peers, AES is well positioned to deliver superior results to its shareholders in 2021.
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AES shares were trading at $27.14 per share on Thursday morning, up $0.33 (+1.23%). Year-to-date, AES has gained 16.25%, versus a 7.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Cristian Docan
Cristian is an experienced investment analyst and financial writer. Prior to StockNews.com, Cristian spent three years as a consultant providing investment research and content to financial services companies and online publications on the Oil & Gas sector. Cristian enjoys researching and writing about stocks and the markets. He takes a fundamental, technical and quantitative approach in evaluating stocks for readers. More...
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