We recently published a list of 7 Most Undervalued Utility Stocks To Buy According To Analysts. In this article, we are going to take a look at where The AES Corporation (NYSE:AES) stands against the other most undervalued utility stocks to buy according to analysts.
According to Research and Markets, the global utilities market size was valued at $6.89 trillion in 2024 and is expected to reach $8.83 trillion by 2028, growing at a compound annual growth rate (CAGR) of 6.4%. The utilities market is expected to experience growth driven by a combination of factors including global population growth, accelerated economic expansion, increased investments in renewable energy, and a rise in utility mergers and acquisitions. Key trends include a focus on investing in Power Purchase Agreements (PPAs), allocating funds toward battery storage for solar energy, and investing in technologies such as smart grids and smart meters.
Utilities: A Stable and Secure Investment
Keith Meister, Managing Partner and Chief Investment Officer of Corvex Management, recently shared his thoughts on the utility sector. Meister emphasized that utilities are good, well-regulated businesses that have historically experienced flat electricity load growth in the country from 2013 to 2023. However, with the advent of new technologies and regulations such as the Inflation Reduction Act (I.R.A.) and Artificial Intelligence (A.I.), the projected growth rate for the sector is now at 3%. This growth is expected to be driven by the increasing demand for electricity, particularly in the context of the rising adoption of renewable energy sources and the growing need for power to support technological advancements.
Meister believes that the U.S. has incentivized great capital markets and investment in the sector, making utilities a good investment for the current cycle. According to Meister, his firm has been actively buying utilities at a 1 to 1.1 rate base, 12 times earnings, due to their attractive investment prospects. He noted that just a couple of years ago, utilities were trading at 20 times the market, but now they are at a much more reasonable two times the market. This decrease in valuation makes utilities an attractive investment opportunity, particularly when considering their guaranteed income and good dividends.
Meister highlighted the sector’s attractive features, including guaranteed income and good dividends, which make it an attractive investment opportunity. Investors don’t need to worry about multiple expansions to get 10% growth on these stocks, and any additional growth or earnings expansion would be a bonus. This makes utilities a relatively stable and secure investment option, particularly in a market where growth and returns are increasingly uncertain.
Our Methodology
To compile our list of the 7 most undervalued utility stocks to buy according to analysts, we used the Finviz and Yahoo stock screeners to find the 30 largest utility companies by market cap that are trading at a forward P/E ratio of under 20 as of October 7. We then narrowed our choices to 7 stocks that analysts saw the most upside to, as of October 7. We also mentioned the hedge fund sentiment around each stock, which was taken from our database of 912 elite hedge funds as of Q2 of 2024. The stocks are sorted in ascending order of their upside potential.
Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 smallcap and largecap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An executive in a power plant control booth overseeing the efficient energy production.
The AES Corporation (NYSE:AES)
Upside Potential: 17.73%
Forward P/E Ratio as of October 7: 9.89
Number of Hedge Fund Investors: 46
The AES Corporation (NYSE:AES) is a utility company that provides affordable and sustainable energy solutions. The company has operations in 15 countries around the world and focuses on renewable energy generation, including solar and wind, while also delivering reliable electricity through conventional energy sources. The company is committed to achieving net zero carbon emissions by 2050 and has made significant strides in expanding its clean energy portfolio.
The AES Corporation’s (NYSE:AES) business model is well-positioned to benefit from the growing global demand for clean energy. The company is rapidly expanding its renewable portfolio, with a goal of reaching 30GW of capacity by 2027, which will support its contracts with major corporate clients such as Microsoft and Google. The AES Corporation’s (NYSE:AES) diverse revenue streams, including electricity generation, utility services, and energy infrastructure, will help the company weather cyclical market conditions. The company’s aggressive shift towards renewables is expected to drive long-term growth, and its growing project backlog is a testament to its ability to execute its growth strategy.
Despite being a major utility company, The AES Corporation (NYSE:AES) is trading at 9.89 times this year’s earnings estimate, a 44.97% discount to its sector median of 17.97. The company’s dividend yield of 3.55% is also attractive, and its investment-grade credit rating is stable. Analysts forecast the company’s earnings will increase by 8.69% this year and are bullish on the company’s stock price, with a consensus Buy rating at a target price of $22.59, which implies a 17.73% increase from its current level.
Overall, AES ranks 1st among the most undervalued utility stocks to buy according to analysts. While we acknowledge the potential of AES as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AES but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.