3 Factors Driving American Electric Power's Stock Higher

What keeps driving up American Electric Power’s stock? Here are three reasons behind its recovery.

Jul 22, 2014 at 5:07PM

American Electric Power (NYSE:AEP) has done well in the past year as its stock gained more than 16%, up to date. Conversely, other leading utility companies such as FirstEnergy (NYSE: FE) and Exelon (NYSE:EXC) haven't performed well. So what's driving American Electric Power's stock higher? 

1. Growth in sales and profit margins
In the first quarter, the company's revenue grew by nearly 22%, year over year. In comparison, FirstEnergy (NYSE: FE) expanded its revenue by 12%; Exelon's (NYSE: EXC) net revenue increased by 19%. These growth rates are still higher than the industry average: During the first quarter, the total retail sales of electricity grew by only 5%, year over year, according to the Energy Information Administration monthly report. But unlike FirstEnergy and Exelon, American Electric Power was able to improve its operating profit from 20% in the first quarter of 2013 to 22% in the past quarter. Moreover, the company increased its annual earnings per share guidance from an average of $3.3 to $3.45 -- another 5% gain compared to its initial estimate. The company also expanded its transmission capital investment by $200 million, which is another positive indicator for expected growth in its operations in the coming years. 

In the second quarter, the weather may have played a positive role again in driving its sales higher. This was the case back in the first quarter, in which the weather added $0.08 to its earnings per share. 

2. Paying the dividend from its profits
American Electric Power's dividend payment is made from its earnings without taking additional debt: Its EPS was $1.15 in the first quarter, and the dividend per share was $0.5. Conversely, FirstEnergy's EPS was $0.29 in the first quarter of 2014 but its dividend per share reached $0.36. The same goes for Exelon: Its earnings per share reached $0.1 while its dividend was $0.31 per share. American Electric Power is able to pay its dividend from its earnings because it has a high profit margin, which reached, as stated before, 22% in the first quarter. FirstEnergy's profitability was only 9.3%. 

The findings above also imply American Electric Power's growing debt is allocated toward capex, while FirstEnergy and Exelon raise their debt burdens only to keep their high dividend payment, which, at these current low earnings won't remain high for long. 

3. More room for growth
The main component of American Electric Power's fuel mix is coal -- nearly 60%. For a better comparison, I have taken two companies that also heavily rely on coal as their energy source. For Duke Energy (NYSE: DUK), coal accounts for 45% of its fuel mix. 57% of FirstEnergy's fuel mix is coal. 

Aep Mix

Source: Yahoo! finance and Damodaran's website.

As you can see, based on enterprise value to EBITDA ratios, American Electric Power has the lowest valuation. Further, the company's current value is even below the industry average. This makes the company's stock low with more room to grow compared to its peers. 

Foolish bottom line
American Electric Power is likely to keep recovering as it keeps presenting steady growth and continues to pay its dividend from its earnings and not from raising debt. 

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Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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