AES Corp (AES): A Beat In The Cards This Earnings Season?

The AES Corporation (NYSE:AES) is set to release third-quarter 2016 results, before the opening bell on Nov 4.

Last quarter, the company posted a negative earnings surprise of 5.56%. Moreover, AES Corp missed the Zacks Consensus Estimate in two of the trailing four quarters, with an average negative surprise of 6.45%.

Let’s see how things are shaping up prior to this announcement.

Why a Likely Positive Surprise?

Our proven model shows that AES Corp is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: AES Corp has an Earnings ESP of +3.13%. That is because the Most Accurate estimate is at 33 cents while the Zacks Consensus Estimate is pegged lower at 32 cents. This is a meaningful and leading indicator of a likely positive earnings surprise. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: AES Corp has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates.

Also, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The combination of AES Corp’s Zacks Rank #3 and +3.13% ESP makes us reasonably certain of an earnings beat.

What’s Driving the Better-Than Expected Earnings?

With respect to portfolio optimization, AES Corp has been witnessing significant consolidation of the regulated utility sector at attractive valuations in Brazil. To capitalize on this trend, the company agreed to sale its 100% ownership interest in Sul, its most material utility business in Brazil. This sale will result in approximately $470 million in equity proceeds.

As of its second-quarter earnings call, the company is currently seeking regulatory approval for this transaction and expects to close it before the end of 2016. Including, the proceeds from the sale of Sul, AES Corp plans to close a total of $540 million in asset sales this year.

In terms of its construction projects, the company expects to witness consistent progress and considers these programs to be its most significant growth drivers. During the third quarter, AES Corp received approval for the 1.4 gig watts Southland repowering project from the California Utility Commission. Currently, it expects to complete the construction of its 5502 mega watt plant in Chile, on-time and on-budget, sometime later in 2016.

However, in Brazil, despite observing modest improvement in energy demand in recent times, the company expects to witness negative growth during the third and fourth quarters of 2016.

While the company’s first-half adjusted EPS was impacted by higher tax rate and softness in U.S. power prices, the majority of its earnings are expected to be generated in the second half of 2016 owing to expectations of a lower effective tax rate, the realization of cost savings initiatives and reduced scheduled maintenance work.

For the third quarter, the Zacks Consensus Estimate for earnings projects a decline of 16.67%, while the consensus for revenues hints at a rise of 3.41% on a year-over-year basis.

Other Stocks to Consider

Here are a few other stocks in the Utility space worth considering on the basis of our model which shows that they have the right combination to pull off a beat:

Pattern Energy Group Inc. (NASDAQ:PEGI) has an Earnings ESP of +16.67% and a Zacks Rank #2. The company is scheduled to release third-quarter results on Nov 7.

FirstEnergy Corp. (NYSE:FE) is scheduled to report on Nov 4. It has an Earnings ESP of +2.63% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Duke Energy Corporation (NYSE:DUK) has an Earnings ESP of +1.28% and a Zacks Rank #3. The company is slated to release results on Nov 4.

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