AES held its year-end 2005 conference call this morning after releasing results on Tuesday. AES, once a high flyer during the 1990s and a major holding in virtually all growth portfolios, is receiving little attention from the investment community as it rebuilds its business and becomes a free cash flow machine.
AES crashed from $86 in 2000 to $1 in October of 2002 before new management was able to convince creditors of its restructuring plans and avoid the bankruptcy plunge. The huge 1990’s interest in the company was due to the great international growth prospects for electricity production as democracy and capitalism flourished around the world. Emerging markets needed electricity to participate in this era of prosperity and AES was the one to provide it. With its global reach and experience in the less developed areas of the world, this provided the company with a great competitive advantage to get a leg up on future competitors. Investors went crazy over the growth prospects for this company.
As the world’s currencies adjusted, overleveraged industries restructured and economies needed to correct their excesses, AES needed to do the same. After generating no free cash flow for investors during the 1990s, the company in 2003 began generating about $1.0 billion in free cash flow each year and was able to considerably lower its debt levels. In addition, despite a weak earnings outlook for 2006, the company expects to generate in excess of $2.0 billion in free cash per year beginning 2008.
The negative in today’s conference call was its earnings outlook for 2006. The company had an excellent 2005, but warned Wall Street of essentially flat earnings for the current year. This is unfortunate considering management has exceeded all the financial goals it set out in its meeting with the investment community in 2003. Management indicated that it will have to pick up some spending to meet environmental standards in the US this year. It is also our belief that management is laying the ground work for higher growth beginning at the end of 2007 and going into 2008. Management hinted that it would begin reviewing these projects in greater detail with the investment community in the fall of 2006.
After avoiding bankruptcy in 2002, AES stock ran up to $8 and hit a plateau until it began to hit its numbers. Today, the stock is around $17 and has moved little since January of 2005, essentially discounting 2006 results. The next big move in AES’s stock will be driven by an upsurge in earnings which will be dependent upon investments they are making in 2006. This is a company that is in the sweet spot of the global boom–emerging markets are filled with wireless phones and they all need to be recharged. The political pressures are too great for government not to have the necessary electricity to meet this demand. If AES management can execute in the next growth phase in the post-bubble environment, investors should be well rewarded. We should see evidence of their success or failure this fall.
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