Fair Value for American Electric

American Electric Power Company, Inc. (AEP - Analyst Report) is one of the largest integrated utilities in the U.S., serving more than five million customers in 11 states. However, the unfavorable order on the construction cost of its West Virginia plant, lower earnings from MEMCO, rising coal costs, and uncertainty surrounding pending regulatory cases collectively continue to weigh on the stock. Thus, we maintain our market-neutral Hold recommendation on the stock.

Consistent performance at the East Regulated segment, new 765-kV transmission lines at PJM, ongoing debt reduction, new power supply contracts in ERCOT (Electric Reliability Council of Texas), and the favorable approval of rate changes from the PUCO (Public Utilities Commission of Ohio) and PUCT (Public Utility Commission of Texas) are expected to drive modest earnings growth at AEP over the near-term.

AEP common stock trades at 13.1x our current-year 2008 operating earnings per share estimate and 12.7x our forward 2009 EPS estimate, or at a moderate discount to the P/E multiple range of comparable diversified energy utilities and the broader electric power utility industry. We set a six-month target price of $44.75, or 13.7x and 13.2x, respectively, our 2008 and 2009 EPS estimates. Price appreciation to our near-term valuation target, coupled with the recently increased $0.41 per share quarterly cash dividend which we deem sustainable and secure represents annualized total return potential of 13.4%.

Read the full analyst report on AEP