American Electric Power Co., Inc. :AEP-US: Earnings Analysis: 2016 By the Numbers : March 15, 2017

American Electric Power Co., Inc. reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of American Electric Power Co., Inc. – Duke Energy Corporation, Westar Energy, Inc., PPL Corporation, Entergy Corporation, Dominion Resources, Inc., Exelon Corporation, NRG Energy, Inc., AES Corporation, Southern Company and Xcel Energy Inc. (DUK-US, WR-US, PPL-US, ETR-US, D-US, EXC-US, NRG-US, AES-US, SO-US and XEL-US) that have also reported for this period.

Highlights

  • Gross margins widened from 25.78% to 26.82% compared to the same period last year, operating (EBITDA) margins now 33.43% from 33.04%.
  • Year-on-year change in operating cash flow of -4.78% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • One-time items weakened operating performance.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 16226.3 16280.6 16901 15246 14866
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 613.4 1763.4 1634 1480 1259
Earnings Growth (YOY) -65.21 7.92 10.41 17.55 -19.96
Net Margin 3.78 10.83 9.67 9.71 8.47
EPS 1.25 3.66 3.34 3.04 2.6
Return on Equity 3.47 10.16 9.93 9.45 8.42
Return on Assets 0.94 2.85 2.82 2.67 2.36

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Earnings Growth Analysis

The company’s year-on-year earnings decline did not come as a result of a contraction in gross margins or because of any cost control issues. Both gross margins and operating margins (EBITDA) margins actually improved over this time frame. Gross margins went from 25.78% to 26.82%, while operating margins improved from 33.04% to 33.43% over this period. For comparison, gross margins were 25.78% and EBITDA margins 33.04% in the immediate last period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

AEP-US‘s change in operating cash flow of -4.78% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The expansion in operating (EBIT) margins from 19.81% to 20.55% has also impacted the company’s earnings growth. However, one-time items have been a drag on the operating performance. As a result, the company’s pretax margins contracted from 16.11% to 2.93%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

American Electric Power Co., Inc. is a public utility holding company that engages in the business of generation, transmission and distribution of electricity. It operates through the following segments: Vertically Integrated Utilities, Transmission and Distribution Utilities, AEP Transmission Holdco, and Generation & Marketing. The Vertically Integrated Utilities segment engages in the generation, transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by its subsidiaries. The Transmission & Distribution Utilities segment engages in the business of transmission and distribution of electricity for sale to retail and wholesale customers through assets owned and operated by its subsidiaries. The AEP Transmission Holdco segment engages in the development, construction and operation of transmission facilities through investments in its wholly-owned transmission subsidiaries and joint ventures. The Generation & Marketing segment engages in non-regulated generation; and marketing, risk management, and retail activities. The company was founded on December 20, 1906 and is headquartered in Columbus, OH.

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