Our rating on Ameren Corp. (NYSE: AEE) is BUY with a target price of $87. Our long-term rating is also BUY.
On November 4, Ameren reported 3Q20 net income of $367 million. The 3Q20 results reflected new Ameren Missouri electric service rates that took effect on April 1, 2020 and increased infrastructure investments. In addition, earnings at Ameren Missouri benefited from lower O&M expenses. The comparison also reflected lower Ameren Missouri energy efficiency incentives compared to the prior year, as well as increased interest expense at the parent company.
The Ameren Illinois Electric Distribution subsidiary reported 3Q20 earnings of $34 million, up from $32 million a year earlier.
Third-quarter earnings at Ameren Transmission rose to $62 million from $53 million a year earlier, also reflecting benefits from recent infrastructure investments.
The wider loss reflected increased interest expense and the timing of income tax expense.
EARNINGS & GROWTH ANALYSIS
Ameren has narrowed its 2020 EPS guidance to $3.40-$3.55 from $3.40-$3.60. The guidance assumes normal temperatures in 4Q.
Our 2020 EPS estimate is $3.50 and our 2021 estimate is $3.66. Over the longer term, we expect a continued favorable regulatory environment, clearer earnings visibility, and ongoing infrastructure improvements. Moreover, we believe that Ameren will continue to benefit from effective management execution, further improvement in its service area economies, and future rate case filings.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on Ameren is Medium-High, the second-highest rank on our five-point scale. Ameren’s long-term debt/capital ratio at the end of 3Q20 was 46%, one of the lowest in the electric utility industry and well below the peer average of 55%. Moody’s rates Ameren’s long-term debt as investment grade.
Capital expenditures in 3Q20 were $1.884 billion, compared with $1.761 billion in 3Q19. Long-term debt was $10.172 billion at the end of 3Q20. The net margin was 12.4% in 3Q20, up from 11.9% in 3Q19.
The annualized payout is $2.06 per share, for a yield of about 2.7%.
MANAGEMENT & RISKS
Warner L. Baxter became chairman, president and CEO of Ameren in 2014. He previously served as president and CEO of Ameren Missouri, the state’s largest energy provider. From 2003 to 2009, he was the company’s CFO. Michael Moehn is Ameren’s CFO, with responsibility for corporate planning, risk management, and financial accounting. He was previously the company’s chief accounting officer.
Ameren has exited the volatile nonregulated merchant energy business, and has shown little interest in acquiring nonregulated assets.
Risks to the company’s share price include plant operations, weather conditions, energy market and economic conditions, unusual or otherwise unexpected losses, regulatory risk (especially construction cost recovery), and potential environmental and safety liabilities.In addition, the capital-intensive nature of the utility industry creates ongoing liquidity risk that must be actively managed by each company.
St. Louis-based. In 2019, the company generated 47% of its electricity from coal, 26% from its Callaway nuclear plant, 4% from hydro sources, 1% from gas, and 22% from outside purchases.
We believe that AEE shares are undervalued at current prices near $77. Over the past 52 weeks, the shares have traded in a range of $59-$88. The price/cash flow ratio and price/sales ratio are both below the peer average.
Our 12-month target price is $87. On December 31, BUY-rated AEE closed at $78.06, up $1.09.