Standing out among the Street's worst performers today is American Electric Power, a electric utilities company whose shares slumped -3.6% to a price of $96.81, 5.34% below its average analyst target price of $102.27.
The average analyst rating for the stock is hold. AEP lagged the S&P 500 index by -7.0% so far today and by -3.5% over the last year, returning 28.5%.
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 company is a utility stock. Historically, the utilities sector has proven to be a safe haven during economic downturns, as they provide an essential service that is always in demand. Investors also tend to choose these stocks because they generally pay attractive dividends. But there is no telling if this will continue in the future.
Utilities tend to have high debt levels because of the enormous capital requirements of maintaining their infrastructure. In periods of rising interest rates, a high debt load can prove disastrous for a company. Another source of uncertainty facing the sector is the imminent rollout of new Federal clean power regulations which will increase costs for utilities, but also provide subsidies for the sector — at least initially.
American Electric Power's trailing 12 month P/E ratio is 19.4, based on its trailing EPS of $5.0. The company has a forward P/E ratio of 16.2 according to its forward EPS of $5.98 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the utilities sector has an average P/E ratio of 20.52, and the average for the S&P 500 is 29.3.
To better understand AEP’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
American Electric Power’s PEG is 2.65, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in American Electric Power's free cash flow, which was $-2366100000 as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $1.29 Billion and they've been growing at an average rate of -24.2%. AEP's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 3.5% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. American electric power's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.97, but is still below the average P/B ratio of the Utilities sector, which stood at 2.2 as of the third quarter of 2024.
Since it has a Very low P/E ratio, an average P/B ratio, and positive cash flows with a downwards trend, American Electric Power is likely overvalued at today's prices. The company has mixed growth prospects because of an inflated PEG ratio and decent operating margins with a stable trend. We hope you enjoyed this overview of AEP's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
