New Renewable Projects Will Improve US Utility Efficiency

Key Takeaways

• Growth in renewables and strategic supply chain management protect margins and bolster revenues.
  
• Investments in U.S. utilities and cost-saving measures enhance net margins and earnings growth.
  
• AES faces revenue and margin risks from contract rigidity, asset sales, policy changes, capital investments, and potential tariff impacts on imported components.

Catalysts

Operates as a power generation and utility company in the United States and internationally.

• AES is on track to significantly grow its renewables EBITDA this year, driven by bringing approximately 3 gigawatts of new projects online, which will likely boost future revenue and earnings.
  
• The robust supply chain strategy, which minimizes exposure to tariffs and inflation by securing equipment ahead of time, ensures stable costs and protects margins.
  
• The $1.4 billion investment program at AES U.S. utilities, including infrastructure improvements and new data center agreements, is expected to drive revenue growth and enhance net margins.
  
• The successful implementation of $150 million in cost-saving measures, reaching a run rate of $300 million by next year, is expected to improve net margins and earnings.
  
• AES's asset sale proceeds and refinanced parent debt maturity enable capital reallocation towards high-return projects, expected to enhance earnings per share through efficient capital use.

AES Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AES's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.8% today to 12.4% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $2.37) by about May 2028, up from $1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, up from 5.7x today. This future PE is lower than the current PE for the US Renewable Energy industry at 25.6x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

AES Future Earnings Per Share Growth

Risks

• AES's reliance on long-term contracted generation can limit its flexibility to take advantage of potentially higher electricity prices in the future, potentially impacting revenue growth.
  
• The recent earnings decline, driven in part by the sale of AES Brazil, highlights the risk of revenue fluctuations due to asset sales, which can affect net margins and earnings.
  
• Exposure to potential changes in U.S. renewable policy, such as the removal of transferability and adjustments to the Inflation Reduction Act, could impact earnings and revenue forecasts.
  
• The company's ambitious infrastructure plans in AES Indiana and Ohio, requiring large capital investments, may exert pressure on cash flows and net margins if not managed effectively.
  
• Potential tariff implications on imported batteries from Korea, although currently mitigated, pose a risk to project cost forecasts and net margins if costs increase beyond estimates.

Valuation

• The analysts have a consensus price target of $14.632 for AES based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.0 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $10.44, the analyst price target of $14.63 is 28.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.