The Market Is Betting Big on AEP - What's the Catch?

American Electric Power Company, Inc., an electric public utility holding company, engages in the generation, transmission, and distribution of electricity for sale to retail and wholesale customers in the United States. The large-cap Utilities company is based in Columbus, United States and has 16,974 full time employees.

AEP's P/E Ratio Is Comparable to its Sector Average

Compared to the Utilities sector's average of 22.89, American Electric Power Company has a trailing twelve month price to earnings (P/E) ratio of 21.7 and an expected P/E ratio of 15.2. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($3.94) or forward earnings per share ($5.62).

Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since American Electric Power Company's P/E ratio is near its sector average of 22.89, we can deduce that the market is fairly valuing the company's earnings.

American Electric Power Company Is Overvalued in Terms of Expected Growth

American Electric Power Company's PEG ratio is 3.07. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in American Electric Power Company's case, it tells us the company is overvalued.

AEP Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For American Electric Power Company, the P/B value is 1.85 while the average for the Utilities sector is 1.03.

AEP's Weak Cash Flow Generation Is Troubling

The table below shows that American Electric Power Company is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in American Electric Power Company's case, free cash flow is growing at an average rate of 5.7% with a coefficient of variability of 21.2%. We can also see that cash flows from operations are evolving at a 5.5% rate, versus 2.5%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 5,288,000 -6,772,400 -1,484,400 22.86
2021-12-31 3,839,900 -5,764,100 -1,924,200 22.51
2020-12-31 3,832,900 -6,316,000 -2,483,100 -32.53
2019-12-31 4,270,100 -6,143,700 -1,873,600 n/a

American Electric Power Company's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing American Electric Power Company's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

American Electric Power Company's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-12-31 19,639,500 8,347,300 57.5 -5.38
2021-12-31 16,792,000 6,588,100 60.77 -4.96
2020-12-31 14,918,500 5,380,100 63.94 7.66
2019-12-31 15,561,400 6,320,000 59.39 n/a

American Electric Power Company's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 19,639,500 7,513,700 19.24 -5.59
2021-12-31 16,792,000 6,781,000 20.38 1.75
2020-12-31 14,918,500 6,550,700 20.03 13.42
2019-12-31 15,561,400 6,492,700 17.66 n/a

American Electric Power Company's cost of revenue is growing at a rate of 7.2% in contrast to 3.7% for operating expenses. Sales revenues, on the other hand, have experienced a 6.0% growth rate. As a result, the average gross margins growth is -0.8 and the average operating margins growth rate is 2.2, with coefficients of variability of 4.5% and 6.3% respectively.

We See Mixed Market Signals Regarding AEP

American Electric Power Company has an average rating of buy and target prices ranging from $113.0 to $87.5. At its current price of $85.32, the company is trading -13.22% away from its target price of $98.32. 1.2% of the company's shares are linked to short positions, and 78.1% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-03-31 Vanguard Group, Inc. (The) 9% 48,706,836 $4,155,667,232
2023-03-31 Blackrock Inc. 8% 41,874,520 $3,572,734,033
2023-03-31 State Street Corporation 5% 27,059,645 $2,308,728,903
2023-03-31 Wellington Management Group, LLP 5% 24,171,020 $2,062,271,419
2023-03-31 Morgan Stanley 3% 13,920,001 $1,187,654,481
2023-03-31 Ameriprise Financial, Inc. 2% 11,292,511 $963,477,035
2023-03-31 Geode Capital Management, LLC 2% 10,054,468 $857,847,206
2023-03-31 Massachusetts Financial Services Co. 2% 8,238,534 $702,911,718
2023-03-31 Invesco Ltd. 2% 8,216,441 $701,026,743
2023-03-31 Bank of America Corporation 1% 7,359,611 $627,922,008
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.