Stocks

ModernGraham Valuation: American Electric Power (AEP)

 

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Company Profile (obtained from Google Finance): American Electric Power Company, Inc. (AEP) is a utility holding company that owns, directly or indirectly, all of the outstanding common stock of its public utility subsidiaries and varying percentages of other subsidiaries. The service areas of AEP’s public utility subsidiaries cover portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. The generating and transmission facilities of AEP’s public utility subsidiaries are interconnected and their operations are coordinated. Transmission networks are interconnected with distribution facilities in the territories served. On December 31, 2011, Columbus Southern Power Company (CSPCo) merged with and into Ohio Power Company (OPCo) with OPCo being the surviving entity. In March 2012, the Company’s subsidiary, AEP Retail Energy acquired BlueStar Energy Holdings Inc. and its independent retail electric supplier BlueStar Energy Solutions.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Calculator)

Key Data:

MG Value $26
MG Opinion Overvalued
Value Based on 3% Growth $43
Value Based on 0% Growth $25
Market Implied Growth Rate 3.78%
Net Current Asset Value (NCAV) -$71.59
PEmg 16.06
Current Ratio 0.76
PB Ratio 1.48

Balance Sheet – 9/30/2013 

Current Assets $4,317,000,000
Current Liabilities $5,692,000,000
Total Debt $16,202,000,000
Total Assets $54,963,000,000
Intangible Assets $91,000,000
Total Liabilities $39,201,000,000
Outstanding Shares 487,260,000

Earnings Per Share – Diluted

2013 (estimate) $2.86
2012 $2.60
2011 $4.04
2010 $2.53
2009 $2.97
2008 $3.39
2007 $2.92
2006 $2.50
2005 $2.63
2004 $2.85
2003 $1.35
2002 $1.46

Earnings Per Share – Modern Graham

2013 (estimate) $2.99
2012 $3.07
2011 $3.26
2010 $2.87
2009 $2.99
2008 $2.95

Conclusion:

American Electric Power Company is a large utility company that pays a healthy dividend, but like many other companies we’ve reviewed recently, its debt is too large to pass the requirements of either a Defensive Investor or an Enterprising Investor.  In addition, the company has failed to grow its earnings, with EPSmg (normalized earnings) of $2.95 in 2008 and only $2.99 estimated for 2013.  Even though the company has good dividends and may be attractive from that angle, the lack of earnings growth may mean that it may not be sustainable to grow dividends as well.  As a result, the company appears to be speculative from a ModernGraham perspective.  From a valuation standpoint, the company’s lack of growth affects the valuation as well, and the company appears to be overvalued by a market that is implying the company will grow at 3.78%.

What do you think?  Is American Electric Power Company overvalued?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in American Electric Power Company at the time of publication and had no intention of entering into a position in the next 72 hours.

Photo Credit:  Andrew Magill

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