Morningstar | AES Reports Strong 2018 and Ups Guidance; Increasing FVE
We are increasing our fair value estimate to $15 per share from $14 after AES reported strong 2018 earnings, initiated a 2019 earnings guidance range above our estimate, and increased and extended their EPS growth target. AES reported 2018 adjusted EPS of $1.24 versus $1.08 in 2017. The adjusted earnings were $0.04 higher than our estimate and beat consensus by $0.03 per share.AES initiated 2019 EPS guidance of $1.28 to $1.40, putting our $1.27 estimate below the guidance range and the consensus of $1.31 near the bottom of the range. We increased our 2019 EPS estimate to $1.34 based on the strong 2018 performance and positive outlook.
AES also increased its EPS annual growth target and extended it by two years. The new target is 7%-9%. This appears to be a reduction from its previous 8%-10% range, however, the new target is based on reported 2018 adjusted EPS of $1.24 versus the previous target’s base of $1.00; thus, management's new target EPS ranges are higher and have been extended through 2022.
AES also increased its parent free cash flow expectation in line with its earnings target. Free cash flow in 2019 is expected to be $700 million to $750 million, up from $689 million in 2018 and $637 million in 2017. The cash to service the dividend, increased by 5% in the 2019 first quarter, is still just over 50% of parent free cash flow. This gives us confidence in our 5% annual dividend increase estimate through 2023. AES yields over 3% as of late February.
We knew that the majority of backlog of long-term power purchase agreements is from projects in the U.S., but we were surprised that management indicated they expect almost 50% of earnings will be from U.S.-based businesses by 2022 versus only about one third in 2018 and less than one fourth just four years ago. However, we are leaving our uncertainty rating at high due to almost 50% of earnings from businesses or projects in developing countries and ongoing construction risk in executing on the backlog.
AES is a holding company. Through its subsidiaries, the company operates a portfolio of electricity generation and distribution businesses. The first business line is generation, where the company owns and/or operates power plants to generate and sell power to customers, such as utilities, industrial users, and other intermediaries. The second business line is utilities, where the company owns and/or operates utilities to generate or purchase, distribute, transmit and sell electricity to end-user customers in the residential, commercial, industrial and governmental sectors within a defined service area. In certain circumstances, the company's utilities also generates and sells electricity on the wholesale market.
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