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Insiders Are Bullish About This Utility Stock

AES (NYSE:AES), a global utility that produces electricity from a variety of sources including coal, natural gas, and renewable, had VP of Strategy Gardner Walkup buy 7,500 shares of the company in his IRA earlier this week at an average price of $12.59 (the stock closed today at $12.61). Walkup previously owned about 26,000 shares directly and another 3,000 in his 401(k), so in percentage terms this represents a large increase in his holdings of the stock. Insider purchases by officers are generally a bullish sign for a stock. Since officers already bear a large amount of company risk merely by working for the company, in order for them to buy stock they generally must be confident of its prospects to overpower the reasons for trying to diversify. Walkup’s action also follows a round of direct purchases by a few company insiders in May at prices around $12/share. 

David Shaw

AES is a rarity in the world of utilities- it is a growth company which does not pay a dividend (and year to date the stock has tracked the S&P fairly closely). In the first quarter of 2012 it grew its revenues by 14% and its earnings by 52% over the same period the previous year. Both regulated revenue (which is revenue generated based on rates that are set or managed by a regulator) and non-regulated revenue increased. Alternatively, the company is organized into several divisions which fall into two categories- Generation and Utilities- and both of these categories saw their revenue increase as well. The stock currently trades at a trailing price-to-earnings ratio of 57, but when further growth is projected out the market cap only sits at about 9.5 times forward estimates. The company uses much of its cash generated from operations on capital expenditures, and according to the most recent 10-Q has over 2,200 MW of projects under development in 11 countries.

There is limited hedge fund activity in AES. According to recent 13F filings, the largest hedge fund holder of the stock was D.E. Shaw, which owned 8.1 million shares. The fund has been gradually reducing its holdings as well, having owned 12.1 million shares a year earlier (see more stock picks from D.E. Shaw). Royal Capital, co-managed by Yale Fergang and Robert Medway, held about 3.3 million shares. Royal has been keeping its position constant for some time. Here is a closer look at Royal Capital’s portfolio.

As an electric utility AES has a number of large-cap peers. Among these are Duke Energy (NYSE:DUK) and Edison International (NYSE:EIX). These are more in line with an observer’s expectation of a utility company, paying substantial dividend yields (4.6% and 2.9%, respectively). However, AES has an advantage over them in that both of these companies saw their earnings fall in the last quarter compared to a year ago by 40-50% while AES’s, as stated above, rose by over 50%. Their forward P/E ratios are higher than AES’s as well. One comparable electric utility in the sense of not paying a dividend is Calpine (NYSE:CPN), which is also close to AES in size at an $8.4 billion market cap to AES’s $9.7 billion. Calpine has struggled to be profitable at all, and saw negative revenue growth compared to a year ago and negative profits in Q1. We believe that investors interested in an unconventional utility stock should consider an investment in AES.

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