Argus Cuts AES Corp To Hold

• AES Corp AES shares recovered over the first two weeks of October, after declining sharply in September; recording a dip of 18 percent since July 20.
• Argus’ Gary Hovis downgraded the rating on the company from Buy to Hold.
• While AES has reported disappointing results for several quarters, its earnings growth is expected to be negatively impacted by a strong USD and pressure on its Brazilian operations, Hovis mentioned.

Analyst Gary Hovis said that AES has reported disappointing results for the past several quarters. From the end of 2010 to the end of 2014, the equity position of the company's shareholders has plummeted 34 percent, from $6.47 billion to $4.27 billion.

Hovis added that long-term debt as a percentage of total capitalization at the end of 2Q15 was at 82 percent, which is relatively high. EBITDA covered interest expense by “a relatively low factor” of 2.6.

The analyst believes that AES' earnings growth would be under pressure for at least the next three-to-four quarters due to a stronger US dollar and continued poor hydroelectric conditions in the company's Brazilian operations.

The EPS estimates for 2015 and 2016 have been reduced from $1.30 to $1.28 and from $1.35 to $1.32, respectively.

Although there is limited upside potential for AES over the next 12 months, there long-term Buy rating has been maintained. “Lately, there has been improvement in AES's operating efficiencies, and we expect the company's highly efficient gas-fired generating units to help drive long-term earnings growth going forward,” Hovis added.

AES would need external financing, given its construction program and infrastructure upgrade schedule. This would exert more pressure on the company’s balance sheet, the analyst noted. “Still, given the current low interest rates, we think the company will be able to obtain a reasonable cost of capital when accessing the capital markets,” the Argus report added.