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Will American Electric (AEP) Miss Earnings Estimates?

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American Electric Power Co., Inc. (AEP - Analyst Report) is set to release its third quarter 2013 results on Oct 23, 2013 before the opening bell. Last quarter, it posted a 5.19% negative surprise. Let’s see how things are shaping up for this announcement.

Factors to Consider

American Electric Power has a stable earnings base of approximately 5 million customers spread over 11 states. Although the company posted weak second quarter results due to higher operations and maintenance expenses (O&M), the company is on track to curb O&M. The company’s cost-control initiatives, particularly overhead cost, are expected to reap benefits in the second half of 2013. The company expects O&M expenses to be flat year over year in 2013.

The company’s three plants are under lean process implementation that calls for shedding waste in order to reduce costs and increase competitiveness. The company has saved $5 million to $10 million per plant in this analysis. In 2014, the company plans to put six to eight plants under this process. Altogether, it plans to bring 15 to 20 plants under this process.

American Electric Power is investing more capital in its regulated business to expand the stable earnings base. Furthermore, geographical diversity enables it to gain transmission opportunities with better returns, compared to its single-state utility peers.

However, tepid economies in a number of its service states, weak residential, commercial and industrial sales and its predominantly fossil fuel based generation assets may restrict opportunities for future performance.

Earnings Whispers?

Our proven model does not conclusively show that American Electric Power is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP:  The Earnings ESP (Expected Surprise Prediction), which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.0%.

Zacks #3 Rank (Hold): The utility’s Zacks #3 Rank (Hold) lowers the predictive power of ESP because the Zacks #3 Rank when combined with a 0.0% ESP makes surprise prediction difficult. We caution against stocks with Zacks Ranks #4 and #5 (Sell rated stocks) going into the earnings announcement.

Stocks to Consider

While an earnings beat looks unlikely for American Electric Power, there are utilities that you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

Alliant Energy Corp (LNT - Snapshot Report), Earnings ESP of +4.55% and Zacks Rank #2 (Buy).

Cleco Corporation (CNL - Snapshot Report), Earnings ESP of +1.91% and Zacks Rank #2 (Buy).

Great Plains Energy Inc. (GXP - Snapshot Report), Earnings ESP of +3.26% and Zacks Rank #2 (Buy).

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