Summary
Ameren is positioned to grow its earnings at an 8% CAGR with EPS growth of 7.45% over the next five years.
The company even has growth ambitions stretching out until 2040 in the renewables sector.
Electrification probably will not result in the enormous consumption gains that some people predict.
The company is easily generating enough cash flow to maintain its 2.52% yield.
Ameren looks undervalued compared to its peers.
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Sebastian Frank/iStock via Getty Images Ameren Corporation (NYSE: AEE ) is a regulated electric utility based in St. Louis, Missouri that primarily provides electric service to customers in Missouri and Illinois, although the company does operate a small natural gas utility in Illinois. Utilities in general tend to be fairly popular among retirees and other conservative investors due to their relatively high yields and stable cash flows. Ameren is no exception to this as the company yields an impressive 2.52% at the current stock price. The company recently posted reasonably solid earnings, which showed both earnings and revenue growth compared to the year ago period. The company is posed to continue this growth going forward, which is also something that is fairly typical for a utility. Ameren does trade at a reasonable valuation considering its potential, which could make it a very solid investment at the current price for an investor that is looking to purchase a utility stock.
As some readers may recall, I last discussed Ameren back in August and stated that this is a growing utility that is trading at a fair price. The company’s earnings results did indeed bear that out, but its growth story is certainly not over yet. In fact, we now have much better visibility into the company’s opportunities to continue this growth to 2031 and even to 2040. That will likewise be discussed below. Investors may also appreciate that the valuation has improved since that time, which could make this an ideal time to purchase shares of the stock. About Ameren Corporation
As mentioned in the introduction, Ameren Corporation is primarily an electric utility that provides services to customers in eastern Missouri and the southern four-fifths of Illinois. The company also provides natural gas services to its customers in Illinois. The electric utility is by far the larger of the two as this business boasts 2.4 million customers compared to only 800,000 natural gas customers: Source: Ameren Corporation
There are certainly some investors that will appreciate that the company’s operations are skewed towards electricity. This is because many believe that electricity has a much stronger future than natural gas. This is because many state governments and the Federal government are actively working to reduce the consumption of fossil fuels. This is a trend called electrification, which we will discuss later in this article. In addition to this, electricity is much less seasonal as it is consumed year-round, but natural gas consumption spikes in the winter due to people using it to heat their homes and businesses. With that said though, electric consumption is higher in the summer due to people using it to power air conditioners. So, if the company’s operations would be more balanced, it may provide a greater of stability with regard to the company’s revenues over the course of the year.
As stated in the introduction, Ameren reported fairly solid results in the third quarter of this year, which was accompanied by both revenue and earnings growth in the year-over-year period. We can see this quite clearly here:
This year-over-year earnings growth was not limited to the third quarter. The company’s earnings per share in the first nine months of the year were also quite a bit higher than in the equivalent period of last year: Source: Ameren Corporation
This sort of growth is certainly typical for utilities as these entities are constantly investing into upgrading their infrastructure. This has the effect of increasing the company’s rate base, which is the value of the company’s assets upon which regulators allow it to earn a specified rate of return. Thus, as the value of these assets increases, the company can charge its customers more in order to generate the specified return. The typical way that companies increase the value of these assets is by investing money into upgrading and modernizing its infrastructure. The fact that this results in growth, thus incentivizes these companies to maintain a modern and properly configured grid. Ameren […]
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