AEP Remains Neutral

On Feb 25, we maintained our Neutral recommendation on American Electric Power Company Inc. (AEP - Analyst Report), on the heels of its strong earnings in the fourth quarter of 2012 along with stable guidance for 2013, tempered by mixed numbers for full year 2012.

Why Maintained?

American Electric Power clocked operating earnings of 50 cents per share in the fourth quarter of 2012, beating the Zacks Consensus Estimate of 45 cents. The company’s results also came above the year-ago quarterly earnings of 40 cents per share. The beat is commendable as this comes in the face of sluggish demand growth and the negative impact of customer switching in Ohio.

On a reported basis, the company registered earnings of 5 cents per share in the reported quarter versus 64 cents per share in the year-ago period. The variance of 45 cents between the reported and operating numbers was due to Ohio Plant impairments charge of 38 cents; restructuring program charge of 4 cents; and UK Windfall Taxes of 3 cents.

Quarterly revenue at American Electric Power was $3.6 billion higher than both the Zacks Consensus Estimate of $3.5 billion and the year-ago number of $3.4 billion. Full year 2012 revenue was $14.9 billion versus the Zacks Consensus Estimate of $15.4 billion. Revenue for the reported full year was also lower than the full year 2011 number of $15.1 billion.

Following the release of the fourth quarter results, the Zacks Consensus Estimate for full year 2013 rose by a penny to $3.14 per share. Meanwhile, the Zacks Consensus Estimate for full year 2014 remained unchanged at $3.31 per share. The company now has a Zacks Rank #3 (Hold).

American Electric Power is one of the largest investor-owned utility holding companies in the country, catering to over 5 million customers spread over 11 states. Historically, however, the company trades at a discount to its large cap electric power utility peers due to its high earnings exposure to industrial customers and its major presence in Ohio.

Going forward, the company offers stable earnings through consistent performance in core regulated operations, growth through transmission network expansion and an above-average dividend yield. However, tepid economies in a number of its service states restrict opportunities for growth. Also, uncertainty surrounding pending regulatory cases, its predominantly fossil-fuel based generation assets and lower wholesale sales continue to weigh on the valuation of the stock.

Other Stocks to Look For

A few stocks that are performing well in the industry where American Electric Power operates are Zacks Ranked #1 (Strong Buy) Brookfield Infrastructure Partners L.P. (BIP - Snapshot Report), Otter Tail Corporation (OTTR - Snapshot Report) and Pike Electric Corporation (PIKE - Snapshot Report).