American Electric Rides on Investments, Interest Rate Woes

American Electric Power Company, Inc. AEP is deploying systematic investments in infrastructural upgrades to enhance the reliability of its operations, which will allow it to serve its utility customers efficiently. The company is also making consistent investments to expand its renewable generation portfolio.
However, this Zacks Rank #3 (Hold) company faces risks like rising interest rates and an unfavorable financial position, which act as a headwind.

Tailwinds

American Electric has a capital investment plan of $43 billion for the 2024-2028 period to strengthen its grid and thereby boost customer reliability. AEP expects this systematic investment to support it in achieving long-term earnings growth of 6-7%.
The company operates the United States' biggest electricity transmission system consisting of roughly 40,000 circuit miles of transmission lines. It has around 225,000 miles of distribution lines. In this respect, American Electric intends to invest roughly $27.3 billion in its transmission and distribution operations between 2024 and 2028 to build a more efficient grid and provide consumers with tailored energy solutions.
In clean energy space, as of Mar 31, 2024, AEP has regulatory nods from several state regulatory commissions to purchase 2,811 megawatts of owned renewable generation facilities for a total estimated cost of $6.6 billion. It plans to invest $9.4 billion in controlled renewable expansion between 2024 and 2028. This should further boost its renewable generation portfolio in the coming years.

Headwinds

Since utility firms like American Electric Power finance their operations through a combination of short and long-term borrowing, the nation's increased interest rate environment remains a headwind for AEP in the form of higher interest expenses. In the first quarter of 2024, the company's interest expenditure increased by 4.8% year over year. If American Electric continues to face such escalating interest costs, it might adversely affect its financial situation in the near future.
As of Mar 31, 2024, American Electric had $38.64 billion in long-term debt, while its cash equivalents totaled $0.50 billion. As of the same date, its current debt was $4.94 billion. As both AEP's current and long-term debt levels remained far greater than its cash reserve, the company seems to have a weak position with respect to its solvency.

Stocks to Consider

Some better-ranked stocks from the same industry are CenterPoint Energy CNP, Pinnacle West Capital PNW and Consolidated Edison ED, each carrying a Zacks Rank #2 (Buy) at present.
CenterPoint Energy's long-term (three to five years) earnings growth rate is 7%. The Zacks Consensus Estimate for the company's 2024 sales indicates an improvement of 1% from the prior-year reported figure.
Pinnacle West Capital's long-term earnings growth rate is 8.2%. The Zacks Consensus Estimate for PNW's 2024 sales suggests an improvement of 4% from the prior-year reported figure.
Consolidated Edison's long-term earnings growth rate is 7.4%. The Zacks Consensus Estimate for ED's 2024 sales calls for an improvement of 3.1% from the prior-year reported figure.
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