On Thursday, Scotiabank (TSX:BNS) adjusted its stance on American Electric Power (NASDAQ:AEP), downgrading the stock from Sector Outperform to Sector Perform and lowering the price target to $102 from $105. The utility giant, currently valued at $49.8 billion, trades at a P/E ratio of 18.7x. According to InvestingPro analysis, the stock appears to be trading above its Fair Value.
The revision follows a strategic analysis by the firm, acknowledging the long-term positioning benefits of the company's current direction under new CEO Bill Fehrman, but also recognizing potential short-term challenges that could dampen investor enthusiasm.
The bank's analyst noted that American Electric Power's efforts to improve its balance sheet and regulatory relationships are ongoing. Despite previous assumptions that the balance sheet repair was nearly complete with a funds from operations (FFO) to debt ratio of 14.7%, management is seeking a larger safety margin above the 13% downgrade threshold. InvestingPro data reveals concerning metrics, including a current ratio of 0.57 and short-term obligations exceeding liquid assets. This conservative approach is seen as a potential limitation on near-term earnings and share price growth.
Additionally, American Electric Power faces a busy regulatory calendar, with ongoing challenges in that area. While the company has made strong progress, these factors are expected to have an impact on investor sentiment. The analyst also mentioned that despite AEP's current advantage in the data center market, lower Generation & Marketing (G&M) earnings are offsetting the rapid growth in utility, leading to downward adjustments in consensus earnings per share (EPS) estimates with the latest guidance.
Scotiabank's revised price target of $102 reflects a 5% discount to the sector anchor multiple of 16 times, down from the previous 5% premium. This adjustment is based on the 2027 EPS estimate, which has been rolled forward from 2026, in line with a sector-wide update.
The new target suggests an 11% upside, but the firm has decided to adopt a more cautious approach, citing too much near-term risk despite the stock's 6% price-to-earnings (P/E) discount. Despite these challenges, InvestingPro highlights AEP's impressive 54-year streak of maintaining dividend payments, with 15 consecutive years of dividend increases. Discover more insights and 8 additional ProTips with an InvestingPro subscription, including comprehensive analysis in the Pro Research Report.
In other recent news, American Electric Power (AEP) reported strong third-quarter operating earnings of $1.85 per share, amounting to $985 million. The company also adjusted its 2024 full-year earnings guidance to a range of $5.58 to $5.68 per share and introduced a 2025 operating earnings guidance range of $5.75 to $5.95 per share. AEP's long-term earnings growth rate is projected at 6% to 8%, backed by a $54 billion capital plan for 2025-2029.
JPMorgan (NYSE:JPM) recently downgraded AEP's stock from Overweight to Neutral, adjusting the price target to $102 from the previous $109, citing challenges in regulatory improvement and growth. Meanwhile, BMO Capital initially raised AEP's price target to $108.00 from $104.00, maintaining an Outperform rating. However, following AEP's weaker-than-expected guidance for 2025, BMO Capital revised the price target down to $104.00, while still maintaining the Outperform rating.
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