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American Electric Power Co Stock Is Believed To Be Modestly Overvalued

- By GF Value

The stock of American Electric Power Co (NAS:AEP, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $88.55 per share and the market cap of $44 billion, American Electric Power Co stock is estimated to be modestly overvalued. GF Value for American Electric Power Co is shown in the chart below.


American Electric Power Co Stock Is Believed To Be Modestly Overvalued
American Electric Power Co Stock Is Believed To Be Modestly Overvalued

Because American Electric Power Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 1.49% annually over the next three to five years.

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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. American Electric Power Co has a cash-to-debt ratio of 0.02, which which ranks in the bottom 10% of the companies in the industry of Utilities - Regulated. The overall financial strength of American Electric Power Co is 3 out of 10, which indicates that the financial strength of American Electric Power Co is poor. This is the debt and cash of American Electric Power Co over the past years:

American Electric Power Co Stock Is Believed To Be Modestly Overvalued
American Electric Power Co Stock Is Believed To Be Modestly Overvalued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. American Electric Power Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $14.9 billion and earnings of $4.42 a share. Its operating margin is 20.03%, which ranks better than 66% of the companies in the industry of Utilities - Regulated. Overall, the profitability of American Electric Power Co is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of American Electric Power Co over the past years:

American Electric Power Co Stock Is Believed To Be Modestly Overvalued
American Electric Power Co Stock Is Believed To Be Modestly Overvalued

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of American Electric Power Co is -1.4%, which ranks worse than 72% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth rate is 1.8%, which ranks in the middle range of the companies in the industry of Utilities - Regulated.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, American Electric Power Co's return on invested capital is 3.63, and its cost of capital is 3.43. The historical ROIC vs WACC comparison of American Electric Power Co is shown below:

American Electric Power Co Stock Is Believed To Be Modestly Overvalued
American Electric Power Co Stock Is Believed To Be Modestly Overvalued

In conclusion, The stock of American Electric Power Co (NAS:AEP, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Utilities - Regulated. To learn more about American Electric Power Co stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.