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Duke Energy Corp (DUK), FirstEnergy Corp. (FE): Is Atlantic Power Corp (AT) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Atlantic Power Corp (NYSE:AT) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Atlantic Power Corp (NYSE:AT)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: are profits, margins, and free cash flow all increasing?
2). Valuation: is share price growing in line with earnings per share?
3). Opportunities: is return on equity increasing while debt to equity declines?
4). Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Atlantic Power Corp (NYSE:AT)’s key statistics:

AT Total Return Price Chart

AT Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 122.6% Pass
Improving profit margin 47.8% Pass
Free cash flow growth > Net income growth (258.8%) vs. (16.2%) Fail
Improving EPS 12.4% Pass
Stock growth (+ 15%) < EPS growth (60.7%) vs. 12.4% Pass

Source: YCharts. * Period begins at end of Q2 2010.

AT Return on Equity Chart

AT Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 51.6% Pass
Declining debt to equity 112.4% Fail
Dividend growth > 25% (63.2%) Fail
Free cash flow payout ratio < 50% Negative FCF Fail

Source: YCharts. * Period begins at end of Q2 2010.

How we got here and where we’re going

Atlantic Power Corp (NYSE:AT) doesn’t put together a dominant performance, as it’s mustered only five out of nine possible passing grades. Despite promising revenue growth, Atlantic’s free cash flow has fallen off a cliff, and that poses big problems for the company’s already-reduced dividend. Will Atlantic be able to rebound, or is the utility going to short out when investors are most in need of a little light? Let’s dig a little deeper to figure things out.

Atlantic Power Corp (NYSE:AT)’s latest bottom-line results showed an unexpected profit, which at $0.02 per share beat estimates by a whopping $0.28. However, that hasn’t been enough to offset the sell-off in Atlantic’s shares after management announced a 66% reduction in its dividend. However, the move — which destroyed a mouthwatering 10.2% yield — resulted in a more sustainable payout ratio, provided the company can return to a positive cash flow. Atlantic’s utility peer Exelon Corporation (NYSE:EXC) has also slashed its dividend payouts to shareholders recently, so the problem is certainly not isolated.

Atlantic has recently divested $208 million of non-core assets to refocus on more profitable business. These cost cutback are more endemic to the beleaguered utility sector than dividend reductions: Duke Energy Corp (NYSE:DUK) aborted has its plan to establish a new $25 billion nuclear plant, while FirstEnergy Corp. (NYSE:FE) will shut down 10% of its capacity to remove coal-fired losses from its fleet of plants. Duke Energy Corp (NYSE:DUK) has actually boosted its payout slightly this year, so it’s at least doing a better job at keeping costs under control.