AES (AES) has upside potential of 19% from its current price levels of $10.9. Wall Street analysts have given it a target price of $12.9.
AES is one of the top losers among the S&P 500 Utilities this year. It has lost more than 7%, while its peers have risen 15% year-to-date. Its lower-than-expected earnings in the last few quarters mainly shaped its stock performance this year. AES derives a large portion of its earnings from competitive operations. Significant operations overseas expose AES to currency risk. As a result, AES’s earnings are relatively less stable compared to industry peers.
The above chart shows AES’s performance this year. However, it had a similar ride in the last five years. Its volatile stock price movement during this period was largely responsible for its underperformance. In the last five years, AES’s total returns came in at ~4% compounded annually, while broader utilities (XLU) returned 14% compounded annually.
AES appears to be trading at a discounted valuation relative to its peers (XLU) (IDU). However, it seems to be trading at a fair valuation to its historical average. On November 15, 2017, it was trading at an EV-to-EBITDA multiple of 8.0x. Its five-year historical EV-to-EBITDA multiple is close to 8x. Currently, utilities’ are trading an average valuation multiple near 11x.
Interestingly, AES’s forward EV-to-EBITDA ratio is below 8x, which indicates expectations of a higher EBITDA next year.