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We have maintained our Neutral recommendation on The AES Corp. (AES - Analyst Report) on Oct 10, 2013.

Why the Reiteration?

AES Corp.’s businesses are spread across 5 continents in 21 countries, representing a highly diversified earnings base. Geographic diversification in its target markets has resulted in a portfolio that is well-positioned for capitalizing on regional differences in power prices and weather-driven demand. This insulates the company from specific risks in any single region or country.

The company is working on its existing projects as well as on new growth projects to minimize risk exposure, leverage strategic relationships and maximize returns. The company continues to exit markets and businesses where it does not have and cannot develop a compelling competitive advantage. Since Sep 2011, the company has made 16 asset sales representing $1.1 billion in equity proceeds and exited operations in 7 countries (from 28) in 2011.

With more asset sales and cash coming in, the company would focus on its cash deployment strategy. During the second quarter 2013, the company repurchased 5.3 million shares at an average price of $11.81 per share, for $63 million.

AES Corp. is focused on streamlining its cost structure. The company is evaluating opportunities across its fleet to standardize equipment and processes and is improving the cost effectiveness of its operations. The company now targets cost reduction of $45 million in 2013. It also believes that it is on track to achieve $145 million in cumulative annual cost reductions in 2014.

The company has a marked presence in many key markets like Chile, the Philippines, India, and Vietnam, where demand for electricity is expected to grow in the foreseeable future.

However, a low dividend yield and high capital expenditures that the company would incur for installation of more clean energy generating plants keep us concerned. Also, long-term supply contracts expose the company to commodity price risk.

Other Stocks to Consider

AES Corp. presently retains a Zacks Rank #3 (Hold). Stocks that are worth considering in the space are Alliant Energy Corp. (LNT - Snapshot Report), Cleco Corp. (CNL - Snapshot Report) and Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), all with a Zacks Rank #2 (Buy).

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