ModernGraham Valuation: AES Corp (AES)

moneyCompany Profile (obtained from Google Finance): The AES Corporation (AES) owns a portfolio of electricity generation and distribution businesses on five continents in 27 countries, with total capacity of approximately 44,200 megawatts and distribution networks. It owns and operates two types of businesses. In its Generation business, it owns and/or operates power plants to generate and sell power to wholesale customers, such as utilities and other intermediaries. In its Utilities business, it owns and/or operates utilities to generate, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors within a defined service area. Its six segments include Latin America-Generation, Latin America-Utilities, North America-Generation, North America-Utilities, Europe-Generation and Asia-Generation. On November 28, 2011, it acquired DPL Inc. In September 2012, Sembcorp Industries Ltd acquired power assets in China from AES.

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 = 2/7

  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 – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  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 – FAIL
  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 = 1/5

  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 – FAIL
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0.00 ** See conclusion
MG Opinion Overvalued
Value Based on 3% Growth $1.40
Value Based on 0% Growth $0.82
Market Implied Growth Rate 69.20%
Net Current Asset Value (NCAV) -$37.97
PEmg 146.90
Current Ratio 1.03
PB Ratio 2.19

Balance Sheet – 9/30/2013 

Current Assets $8,251,000,000
Current Liabilities $8,009,000,000
Total Debt $18,533,000,000
Total Assets $41,250,000,000
Intangible Assets $2,266,000,000
Total Liabilities $36,437,000,000
Outstanding Shares 742,250,000

Earnings Per Share

2013 (estimate) $0.73
2012 -$1.21
2011 $0.59
2010 -$0.11
2009 $1.09
2008 $1.80
2007 $0.73
2006 $0.43
2005 $0.95
2004 $0.57
2003 $0.56

Earnings Per Share – ModernGraham 

2013 (estimate) $0.10
2012 $0.00
2011 $0.67
2010 $0.74
2009 $1.11
2008 $1.05

Conclusion:

AES Corp fails nearly all of the requirements of both the Defensive Investor and the Enterprising Investor.  The only thing Intelligent Investors following Benjamin Graham’s value investing methods would like about this company are the market cap, the PB ratio, and the fact that it currently pays a dividend.  From a value investing standpoint, there is simply too much risk involved in this company for Intelligent Investors, and they should seek better opportunities through a review of Defensive and Enterprising Investor companies we’ve reviewed previously.  From a valuation side of things, the company does not fare well in the ModernGraham valuation model.  The company has seen a drop in its EPSmg (normalized earnings) from $1.05 in 2008 to an estimated $0.10 for 2013.  This negative growth results in a valuation of $0 in the model, indicating that any value must come from the balance sheet rather than earnings.  Since the net current asset value is also negative, the company would appear to be overvalued at this time.

What do you think?  Do you agree that AES Corp is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in AES Corp (AES) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill


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