Ameren Corporation (AEE) is an integrated utility headquartered in St. Louis, Missouri. The company’s stable and regulated electric power operations in the Midwestern market generate a relatively stable and growing earnings stream.
Future growth will be guided by improved plant operations, a focus on cost management, a recovering economy boosting industrial sales and installation of emissions reduction equipment (scrubbers) at its generation plants.
Ameren’s Missouri service area’s economy is reporting lower unemployment rates (8.9%) compared to the national average (9.1% as of May 2011) per the U.S. Bureau of Labor Statistics. Meanwhile, Illinois is reporting progressively falling unemployment levels.
Unemployment rate dropped to a two-year low of 8.7%. Steady improvement in its service areas will perk up consumption of electricity, boosting the top line.
However the above positives are offset mainly by the projected downside in the near-term at its merchant generation segment as a result of lower realized power prices, reflecting the economic slowdown, and higher fuel and related transportation costs, reflecting the expiration of lower-cost coal and rail contracts.
We also remain cautious on the stock, owing to Ameren’s marked dependence on coal for generating electricity. The company produced 85% of its electricity in fiscal 2010 from coal-fired facilities. This dependence on coal requires significant capital expenditure, such as installing scrubbers to comply with environmental standards set by federal agencies.
Management estimates that it would have to shell out approximately $1.6 billion-$1.9 billion in the period 2011-2017 for complying with federal and state clean air standards.
The Ameren stock is currently trading at a discount to its peers like, PPL Corporation (PPL), and NRG Energy Inc. (NRG) in terms of current fiscal earnings estimate.
However, headwinds in merchant generation, predominantly coal-based generation assets and pending regulatory cases warrant a discounted valuation of the company versus its peers. As such, we see limited upside from current levels and maintain our market Neutral recommendation for Ameren.
AMEREN CORP (AEE): Free Stock Analysis Report
NRG ENERGY INC (NRG): Free Stock Analysis Report
Be the first to comment