Goldman Sachs Sees Multiple Expansion For American Electric Power Company

Although American Electric Power Company Inc AEP has historically traded at a discount to its Regulated Utility peers, Goldman Sachs’ Michael Lapides believes the stock deserves to trade at a higher multiple.

Lapides upgraded the rating on the company from Neutral to Buy, while raising the price target from $71 to $73.

Multiple Expansion Potential

The analyst mentioned that accelerating core growth at American Electric Power’s regulated segment warrant a higher multiple, while asset divestitures that reduce the scale and size of non-regulated business are also likely to drive multiple re-rating higher.

Lapides believes at the current valuation, the stock is attractive, while viewing the 7 percent total return favorably.

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The Positives

The analyst pointed out that solid transmission growth has been driving 7 percent consolidated EPS growth, along with 9 percent growth in the core regulated segments.

In addition, American Electric Power’s free cash flow is improving, while the company could drive higher profitability through the divesture of parts of or the entire merchant generation business.

In fact, Lapides views the potential shift to a more regulated entity as positive for the company.

According to the Goldman Sachs report, “A potential divestiture of the non-regulated generation assets could drive (1) capital allocation, including buybacks and debt reduction, as well as (2) increased transmission investment.”

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