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Utilities in 2021, AEP Earnings Call Reactions and Spring Conference Season

by on March 17, 2021

The utilities sector has started off the year sluggish, underperforming the broader stock market. Members of AEP’s management have had a busy February and March, meeting with investors to tell the AEP story. AEP held its Fourth Quarter 2020 Earnings Call with sell-side analysts and investors on Feb. 25. AEP leaders shared their perspective on 2020 financial results and 2021 highlights, as well as offered insight on rates cases, carbon emissions goals and the transformation of AEP’s generation fleet. AEP continued momentum into the first week of March where management participated in three investor conferences in a two day span.

This Street Wise edition summarizes analysts’ views on the market and the street’s reaction following the earnings call and investor conferences.

Utility Underperformance

The utility sector felt pressure most of 2020 and has continued to feel it through the first quarter of 2021. The S&P Electric Utility Index has experienced a 2021 year to date decline of 4.4% in comparison to the S&P 500 Index’s increase of 1.7% year to date. Comparatively, AEP’s stock price has decreased 3.3% during that same time period. The underperformance can be attributed to rising interest rates and inflation. Interest rate volatility directly influences utilities because utility stock performance has an inverse relationship with interest rate activity. As interest rates fall, utility stock prices typically increase. As interest rates rise, utility stock prices usually decline.

In 2020, interest rates were at some of their lowest levels, yet utilities still managed to underperform for the year. Coupled with the underperformance experienced thus far in 2021, the sector offers a discounted buying opportunity as noted by Steve Fleishman of Wolfe Research, “This has been a speculative macro environment focused on growth, momentum, and a stimulus and vaccine driven recovery with expectations for inflation and higher rates. Utilities are the last sector on investors’ minds. With that said, utilities are cheap and already reflect a much higher rate environment and the market itself is more at risk if rates keep rising than utilities. The extent of utility underperformance this cycle is already more than normal and the fact that utilities underperformed while rates were falling is rare. We continue to view current record low valuations and overall solid fundamentals as attractive long-term buy levels here.” 

AEP’s management team utilized the fourth quarter 2020 earnings call and subsequent investor conferences as opportunities to communicate upcoming catalysts and long-term strategies of the company.  

2020 Earnings Call

AEP reported fourth quarter and full year 2020 operating earnings per share (EPS) of $0.87 and $4.44, respectively. These results beat the corresponding analyst consensus estimates of $0.78 and $4.34 per share. AEP rolled out several important announcements on the call to serve as catalysts of growth in future years in addition to the reporting of 2020 earnings. Management raised the 2021 operating earnings guidance range by $0.04 to $4.55 to $4.75 per share and reaffirmed AEP’s long-term growth rate of 5%-7% off of the new guidance. Management also announced the acceleration of its carbon emissions reduction goals to 80% by 2030 and net zero by 2050, as well as the roll out of up to 3,300 megawatts of renewable opportunities at SWEPCO. Management noted that a refresh of renewable additions at the remaining operating companies would be disclosed by the first quarter earnings call.

While analysts and investors were focused on 2021 and beyond during the call, Andrew Weisel of Scotiabank summarized, “With another strong result, AEP has beat the midpoint of its initial guidance range eight years in a row, by an median of 3%. Moreover, actual EPS has exceeded consensus forecasts from the prior September in seven of those eight years, by a similarly-wide margin of 2.7%. AEP's ability to cut costs has been tremendous, contributing to the beats.”

Neil Kalton also commented on 2020 earnings noting, “AEP delivered strong 2020 adjusted EPS of $4.44 despite the challenges posed by COVID-19 and a $0.14 weather headwind. The performance speaks to AEP’s cost management abilities.”

Related to 2021 guidance and long-term outlook, Julien Dumoulin-Smith of Bank of America commented, “AEP raised 2021 guidance and rolled forward its 5%-7% EPS growth rate of the new higher 2021 base with a bias towards the upper half of the range. AEP is also accelerating its carbon emissions reduction target to net zero by 2050. Notably, we highlight up to 3,300 megawatts of new proposed renewable energy to serve SWEPCO customers, with 5,600 megawatts of coal reduction by 2030. We maintain neutral as we believe these positive updates are largely reflected in the street’s outlook.”

Durgesh Chopra of Evercore ISI anointed AEP as its top pick based on 2021 prospects stating, “We continue to see execution in ongoing rate cases and cost cutting to mitigate COVID-related impacts to maintain/improve cash flow metrics. AEP stands to benefit more than most from an improvement in commercial & industrial load in 2021 given its large exposure to those customers. The company is well-positioned for the Biden administration as we believe it will have a modest cash flow and earnings benefit from a potential tax rate change eventually; more importantly, a Biden climate plan presents a sizable capex opportunity for high coal exposure regulated players like AEP. AEP is trading at a discount despite being a pure play electric utility with above-average earnings growth prospects. Further, most of this growth is driven by spending on lower risk electric transmission and distribution.”

March Investor Conferences

There was no slowing down for management as the Investor Relations team accompanied them in conferences hosted by Morgan Stanley, Bank of America and Barclays. AEP met with equity and fixed income investors representing approximately 100 companies. Topics were focused on the announcements made on the fourth quarter call in addition to credit metrics and financing, asset optimization, the AEP Ohio rate case and the impact of the south central winter storms.

At the conclusion of the conference week on March 5, AEP’s stock price closed at $78.90 or up $1.10 and 2.3% in comparison to Feb. 24, the day before the earnings call. Helping the momentum gained from the earnings call and conferences attended was positive regulatory activity.

Upcoming Events

In the coming weeks, Investor Relations will accompany members of AEP management to a fireside chat with UBS, and two virtual investor conferences with Guggenheim and Evercore ISI.

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Watch for future Street Wise editions discussing earnings and regulatory updates related to AEP and the electric utility industry.

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