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American Electric Power Co Valuation – November 2015 Update $AEP

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how American Electric Power Co (AEP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): American Electric Power Company, Inc. is a utility holding company. It operates in five segments. The vertically integrated utilities segment generates, transmits and distributes electricity through AEP Generating Company, Appalachian Power Company, Indiana Michigan Power Company, Kingsport Power Company, Kentucky Power Company, Public Service Company of Oklahoma, Southwestern Electric Power Company and Wheeling Power Company. The Transmission and Distribution Utilities segment transmits and distributes electricity through Ohio Power Company, AEP Texas Central Company and AEP Texas North Company. The Generation & Marketing segment’s subsidiaries consist of nonutility generating assets, a wholesale energy trading and marketing business and a retail supply and energy management business. AEP Transmission Holdco is a holding company for AEP’s transmission joint ventures and AEP Transmission Company, LLC. The AEP River Operations segment transports liquid, coal and dry bulk commodities.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of AEP – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $27,370,711,329 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.64 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 16.38% Fail
6. Moderate PEmg Ratio PEmg < 20 16.85 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.57 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.64 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -7.01 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

AEP value Chart November 2015

EPSmg $3.35
MG Growth Estimate 0.49%
MG Value $31.76
Opinion Overvalued
MG Value based on 3% Growth $48.58
MG Value based on 0% Growth $28.48
Market Implied Growth Rate 4.18%
Current Price $56.46
% of Intrinsic Value 177.78%

American Electric Power Co does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned by the low current ratio, and the insufficient earnings growth over the last ten years.  The Enterprising Investor has concerns with the level of debt in relation to the current assets. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $3.24 in 2011 to an estimated $3.35 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 4.18% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on American Electric Power Co (AEP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

AEP Charts November 2015

Net Current Asset Value (NCAV) -$79.16
Graham Number $54.86
PEmg 16.85
Current Ratio 0.64
PB Ratio 1.57
Dividend Yield 3.75%
Number of Consecutive Years of Dividend Growth 6

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $4,548,000,000
Total Current Liabilities $7,058,000,000
Long-Term Debt $17,600,000,000
Total Assets $61,099,000,000
Intangible Assets $53,000,000
Total Liabilities $43,400,000,000
Shares Outstanding (Diluted Average) 490,800,000

Earnings Per Share History

Next Fiscal Year Estimate $3.71
Dec14 $3.34
Dec13 $3.04
Dec12 $2.60
Dec11 $4.02
Dec10 $2.53
Dec09 $2.96
Dec08 $3.42
Dec07 $2.72
Dec06 $2.53
Dec05 $2.08
Dec04 $2.75
Dec03 $0.29
Dec02 -$1.57
Dec01 $3.01
Dec00 $0.83
Dec99 $3.03
Dec98 $2.81
Dec97 $2.70
Dec96 $3.14
Dec95 $2.85

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.35
Dec14 $3.15
Dec13 $3.05
Dec12 $3.07
Dec11 $3.24
Dec10 $2.85
Dec09 $2.92
Dec08 $2.83
Dec07 $2.38
Dec06 $1.88
Dec05 $1.48
Dec04 $1.14
Dec03 $0.59
Dec02 $1.04
Dec01 $2.39
Dec00 $2.22
Dec99 $2.91

Recommended Reading:

Other ModernGraham posts about the company

22 Companies in the Spotlight This Week – 11/29/14
American Electric Power Company Inc. Annual Valuation – 2014 $AEP
ModernGraham Valuation: American Electric Power (AEP)

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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