First Pitch Swinging

As the saying goes, “follow the money.” Investors might consider adlibbing that a bit to, “follow the people who follow the money.”

According to Investopedia, “The term chief financial officer (CFO) refers to a senior executive responsible for managing the financial actions of a company. The CFO’s duties include tracking cash flow and financial planning as well as analyzing the company’s financial strengths and weaknesses and proposing corrective actions.”

In other words, the CFO is the person who counts the money. Nobody should have a better understanding of a company’s financial position than the Chief Financial Officer. Investors tracking insider buys and sells should pay special attention to CFO activity because of their intimate knowledge of the money flow.

In the same vein, we pay attention to how much money as well. We’ve said it before and will say it again and again and again… dollar size can be seen as a measure of conviction. It takes a lot more confidence to invest $1 million versus $1,000.

Seeing The AES Corporation (AES) CFO Stephen Miller make his first insider open market trade, buying a little north of $1 million, inspired us to dig deeper. (1) His limited history prior to last week was a few options related transactions. If you think about it, most people don’t dive into the deep end of the pool the first time they jump into the water. Yet, that’s sort of what Miller did with his virgin transaction. One million dollars is not testing the water, in our opinion.

The AES Corporation operates as a diversified power generation and utility company. It owns and/or operates power plants to generate and sell power to customers, such as utilities, industrial users, and other intermediaries. It uses a range of fuels and technologies to generate electricity, including coal, gas, hydro, wind, solar, biomass, and renewables, such as energy storage and landfill gas. The company owns and/or operates a generation portfolio of approximately 31,459 megawatts and has operations in the United States, Puerto Rico, El Salvador, Chile, Colombia, Argentina, Brazil, Mexico, Central America, the Caribbean, Europe, and Asia.

The CFO’s first trade timing might prove to be accurate as the power provider has been trending lower since November 2021, with the angle of descent getting sharper in 2022. AES shares pivoted higher in late February and recently triggered a potential technical buy signal.

Last week, AES corporation’s stock price broke through overhead resistance and crossed from below to above its 50-day moving average. Both maneuvers are considered bullish by most chart-watchers. It’s the first time in 2022 that AES shares have traded above its trendline and the 50-day benchmark.

Of course, any further advancement in the immediate term will depend heavily on the war between Russia and Ukraine. If a ceasefire comes, some speculate as early as this week, stocks will likely rally aggressively. Of course, if the fighting worsens and expands, then we haven’t seen the end of selling or the bottom.

Longer-term, analysts believe AES will earn $1.77 per share (EPS) next year with sales hitting $11.47 billion. (2) In the last half-decade, AES traded as low as 12.79 times earnings (P/E), as high as 25.17 and averaged 17.69 times EPS.

Using the Street’s EPS consensus and its five-year price to earnings’ history, we can build out a potential price range for AES.

High P/E: $44.55
Average P/E: $31.31
Low P/E: $22.64

Let’s do the same exercise for the topline. For the last five years, investors paid an average of 1.07 times sales (P/S), as little as 0.48, and as much as 1.97 times the top line.

Once again, using analysts’ 2023 topline target and recent P/S history, we can create a potential range for AES shares.

High P/S: $33.86
Average P/S: $18.47
Low P/S: $8.25

Meanwhile, Wall Street has a one-year price target of $28.90 on the Utilities company. (3) That’s 30% higher than where AES trades as we type, $22.20. Additionally, AES has a $0.63 annual dividend, yielding 2.85%.

Overall: The AES Corporation (AES) appears to have an attractive reward-to-risk profile based on its recent P/E history and expected 2023 earnings. However, if global politics go much further off the rails, then the utility company could be heavily discounted from its current price at its P/S low for the last half-decade.

While we’d like to believe the worst-case scenario is unlikely, you never know in volatile political times, like we are in now. A miscalculation could be catastrophic.

 

1 – https://www.secform4.com/insider-trading/1887269.htm

2 – https://finance.yahoo.com/quote/AES/analysis?p=AES

3 – https://finance.yahoo.com/quote/AES?p=AES