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AES Earnings: New Business Unit Structure Highlights AES’ Transformation

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The AES Corp
(AES)

We are reaffirming our $23 per share fair value estimate after AES reported first-quarter adjusted earnings of $0.22 per share compared with $0.21 in the same year-ago period.

At the beginning of the year, we viewed AES stock as rich trading with a 2-star rating. With the stock down 21% for the year to date, we now view AES as being fairly valued.

The company reaffirmed 2023 EPS guidance of $1.65 to $1.75, consistent with our expectations. Management also reaffirmed its 7% to 9% annual earnings growth rate through 2025, which we expect AES to achieve.

Highlighting the simplification of AES portfolio in the past decade, AES announced four strategic business units: Renewables, Utilities, Energy Infrastructure, and New Technologies. While we think management has done a commendable job simplifying AES’ structure, we continue to assign a higher cost of capital than its fully regulated North American peers in large part because of its international operations and emerging technology investments. This leads to a lower relative valuation compared with its fully regulated peers.

In April, AES reached a constructive settlement in its Electric Security Plan filing, supporting continued investment.

AES is continuing its move away from coal generation, reaching an agreement to terminate its power purchase contract at the Warrior Run coal plant through May 2024, subject to regulatory approval. In California, AES reached an agreement to extend the lives by three years of 1.4 gigawatt of gas generation to support the state’s clean energy transition.

At the end of the first quarter, the company’s wind and solar backlog was flat at 12 GW. Last year, the company added 5.2 GW of renewable generation to its backlog.

Earnings in the quarter benefited from investments in the company’s Energy Infrastructure and New Technologies business units, partially offset by lower contributions from its Utilities and Renewables segments. Unfavorable weather was a drag for the utilities segment.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Andrew Bischof

Strategist
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Andrew Bischof, CFA, CPA, is an equity strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers regulated utilities, diversified utilities, and independent power producers.

Before joining Morningstar in 2011, Bischof was a senior treasury analyst for Mead Johnson Nutrition. Previously, he was a group audit officer for Bank of America in Chicago, and before that, an auditor for Ernst & Young.

Bischof holds a bachelor’s degree in business administration and accounting and a master’s degree in accounting from the University of Wisconsin. He also holds a master’s degree in business administration, with a concentration in finance, from Indiana University’s Kelley School of Business and the Chartered Financial Analyst® and Certified Public Accountant designations.

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