Building Momentum With Strategic Investments And High-Margin Goals To Power Future Growth

Key Takeaways

• AES's focus on high-margin corporate customers and securing large PPAs is anticipated to improve both revenues and net margins significantly.
  
• Strategic investments and supply chain management position AES for robust growth, enhancing earnings and mitigating policy change risks.
  
• AES's profitability is under pressure from weather volatility, operational challenges, asset sales, and ambitious investment plans which could strain margins and cash flow.

Catalysts

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

• AES has signed or been awarded 2.2 gigawatts of new contracts including long-term renewable PPAs and new data center load growth, which are expected to boost future revenues significantly.
  
• The company has added 3.5 gigawatts of new PPAs to its backlog, with a significant focus on high-margin corporate customers, which should positively impact net margins.
  
• AES is investing heavily in its U.S. utilities, AES Indiana and AES Ohio, with planned double-digit rate base growth through 2027, expected to enhance long-term earnings.
  
• The strategic sale of AES Ohio equity will free up capital for increased investments in reliability and economic development, potentially improving net margins through efficiency.
  
• AES's strong supply chain management for renewables, including securing domestically manufactured components, positions it well for future revenue growth regardless of potential changes in federal policies or tariffs.

AES Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AES's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 13.1% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $2.31) by about November 2027, up from $1.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $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 12.1x on those 2027 earnings, up from 9.4x today. This future PE is lower than the current PE for the US Renewable Energy industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 5.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.71%, as per the Simply Wall St company report.

AES Future Earnings Per Share Growth

Risks

• AES Corporation reported significant impacts on its adjusted EBITDA due to extreme weather conditions in Colombia and lower margins in the energy infrastructure sector, suggesting volatility in revenue and earnings.
  
• The company is facing pressure from unplanned outages in Mexico and declining spark spreads in California, particularly affecting its energy infrastructure business, which could reduce net margins.
  
• AES sold its stake in AES Brazil as part of its asset sale strategy, reducing exposure to Brazilian market volatility but also losing out on potential revenue from this region.
  
• AES is undertaking an ambitious investment program with projected growth in rate base, but increased investments could strain net margins and cash flows if not managed properly.
  
• AES faced challenges related to renewable energy resource volatility and equipment failures under warranty, which may impact future earnings stability and project reliability.

Valuation

• The analysts have a consensus price target of $21.21 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 $25.0, and the most bearish reporting a price target of just $16.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $14.6 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of $13.62, the analyst's price target of $21.21 is 35.8% 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.