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Analyzing AES’s Valuation and Bright Upside Potential

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Analyzing AES’s Valuation and Bright Upside Potential PART 1 OF 6

AES Looks Weak before the Expected Rate Hike

Utilities are weak 

US utility stocks started to show signs of distress as the Fed meets next week. On March 8, 2017, AES (AES), one of the most geographically diversified utilities, lost 2.3%. The Utilities Select Sector SPDR (XLU) fell nearly 1.4%. Broader markets (SPY) (SPX-INDEX) showed a marginal correction of 0.2% for the day.

Recently, Treasury yields rose significantly. The ten-year Treasury yield rose more than 25 basis points in the last few trading sessions after hitting a low of 2.3% on February 24, 2017.

AES Looks Weak before the Expected Rate Hike

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Utilities and the Fed’s hawkishness

Recently, the Fed seemed to become surprisingly aggressive about rate hikes. What concerns utility investors isn’t just a possible rate hike this month, but if the Fed increases rates faster than expected in 2017. According to CME, traders anticipate that there’s a 92% chance of a rate hike at the Fed’s March meeting.

Utilities, at large, rose more than 4% so far this year. In comparison, AES stock corrected by more than 6% during the same period.

AES’s 4Q16 earnings came in at $0.35 per share—compared to analysts’ estimates of $0.36 per share. AES expects annual earnings per share growth of 8%–10% though 2020. It’s higher than the industry average.

In the next part, we’ll see how AES stock is placed in the short term.

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