Why AES Is a Remarkable Long-Term Buy

| About: The AES (AES)
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By Roger Choudhury, Lead Editor

AES (NYSE:AES) is projected to grow non-GAAP EPS by 12.76% in 2011 followed by 11.83% growth in 2012.

The company is a global power company that provides energy in 28 countries. It is also #150 in the Fortune 500. In 2010, revenues grew by 17.90% to $16.647 B, which beat the Street by over $2B. However, non-GAAP EPS fell by 18.26% to $0.94, but met consensus estimates. GAAP EPS also dropped by 98.98% to $0.01. The company also has a debt to equity ratio of 2.43.

For 2011, the Street expects non-GAAP EPS to rise by 12.76% to $1.06 with revenues of $16.9 B (+1.51%). AES stated in its Q1 2011 Financial Review that non-GAAP EPS should be between $0.97 and $1.03. Q1 2011 non-GAAP EPS came in at $0.22, which was below consensus by $0.04. For 2012, analysts forecast that non-GAAP EPS will increase by 19.81% to $1.27 alongside revenues of $18.9 B (+11.83%). AES also provides its own forecast for non-GAAP EPS of between $1.27 and $1.37.

Due to the global nature of the company's operations, it stands to benefit from even stagnant to slow economic growth because the bottom was reached in 2009. For example, in 2010, the company grew revenues in Latin America by 18.06% to $11.503B; in Europe, revenues increased by 66.09% to $1.362 B; and in Asia, revenues rose by 64.80% to $618M. The company also completed 777 MW of construction projects in Asia, Europe, and Latin America. Additionally, with buoyant growth opportunities in countries like Turkey, Chile and Vietnam, AES was also able to invest approximately $1B in construction and development projects. On April 20, 2011, the company agreed to acquire DPL Inc. for $4.7B in cash and assumed debt. It is the parent company of Dayton Power & Light Company and serves over 500,000 customers in West Central Ohio.

AES trades with a P/E of 14.0 with the trailing 12 months non-GAAP EPS at $0.88. The forward 2011 P/E is 11.6, and the forward 2012 P/E is 9.7. To find a reasonable P/E, we look to 2009, where revenues declined by 12.14% and GAAP EPS fell by 46.15%. P/E then was 12.2. The debt to equity ratio was also higher at 3.84. So, using a P/E of 13.0, we place a price target of $13.75 after all 2011 results have been priced in. Similarly, our 2012 price target is $16.50.

At a current share price of under $12.50, this is a buy. You are looking at a return of over 30% in 20-24 months. We recommend this for investors that are relatively risk-averse.

We also like California Water Service Group (NYSE:CWT), New Jersey Resources (NYSE:NJR) and South Jersey Industries (NYSE:SJI).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.