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Market Price (2/27/2017): $11.14/share; ST-Target: $19/share; NIV: $36/share
At precipice of demonstrating its LT potential
Our previous AEPS CAGR estimate thru 2021 was 9%; guidance thru 2020 is 8%-10%. But, 2017E AEPS guidance of $1.00-$1.10 seems light. Regardless of forward expectations, AES is trading as if its growth prospects are next to none. As expected, 2016 appears to be bottom and forward prospects for AES look better; AES: 1) is out of many riskier or no-growth-prospect countries, 2) has sold or reduced its interests in non-performing plants, riskier businesses, or assets that have no growth potential, 3) has begun accelerating its investment program, 4) significantly and continues to reduced parent debt, 5) has businesses in stable countries/regulatory-regimes, 6) even troubled assets like Maritza in Bulgaria and Argentina seem to have turned corner, and 8) it’s seriously going green in US. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) stubbornly clings to an inexplicably high investment hurdle rate. Regardless, given its investment program we look for it to overshadow our reduced $19/share ST-Target and march towards our reduced NIV of $36/share in the MT-to-LT. We like acquisition of sPower for some $1.6B, which appears to be accretive by over $1/share to our NIV; no meaningful earnings accretion in ST.