Ameren Corporation Financial Data - Case Study Example

I. Introduction Ameren Corporation is an energy utility company that served 70 countries worldwide. Its “strategy will be to build value for shareholders, maintain competitive prices for customers, and create opportunities for employees now and into the next century” (Stagen). The main purpose of this paper is to bring to light matters of Ameren Corporation and to determine if the company’s securities are a good investment or not. II. Company Analysis Last 1997, Ameren was born when the Union Electric Company (UE) of St. Louis, Missouri merged with its neighboring investor-owned public utility, CIPSCO Inc. which is the holding company of Central Illinois Public Service Company. Due to this merger, Ameren was able to widen its geographic scope and became one of the nation’s largest utility holding companies. It is now the parent company of UE and CIPSCO Inc. that primarily serve the people of Missouri, Illinois and Iowa (Stagen). Ameren is traded in the New York Stock Exchange (NYSE) under the NYSE ticker symbol, AEE (“Ameren Stock Price”). Ameren Missouri is headquartered in St. Louis, Missouri and Ameren Illinois is based in Peoria, III, and its current president and CEO is Thomas R. Voss. On the other hand, Ameren has a 0% insider ownership and 58% institutional ownership (“Ameren Corporation (AEE-NYSE”). Aside from being the largest electricity provider in Illinois and Missouri, Ameren is also a natural gas and oil distributor, an operator of nuclear and hydroelectric power plants, merchant power production and other energy-related services (“Ameren Facts”). Recently, the company is held as one of the “nation’s largest investor-owned electric and gas utilities” serving “2.4 million electric and nearly one million natural gas customers around a 64,000-square-mile are of Illinois and Missouri” (“Our Businesses”). Before UE and CIPSCO had decided to merge, the two utility companies were already having their owned holding companies and energy facilities. However, in order for them to be well-prepared for intense competition brought by energy market deregulation, the shareholders of the two businesses have decided to have a joint operation. The combination had formed a newly holding corporation named Ameren, Missouri’s largest electric utility. The merged has been successful in terms of demand stability, profitability and sales revenue; however, because of several factors such as weather conditions, economic situation, state and federal regulation, high fuel costs, etc., the demand had declined. For the fiscal year for 2010, Ameren’s sales are $7.64 billion with a 1-year sales growth of 7.73%. Furthermore, its total net income has declined from $612.00 million in 2009 to $139.00 million in 2010 with a 1-year net income growth of -77.29% (see figure 1). Figure 1: Revenue vs. Net Income and Cash Flow from Operations Source: “Ameren Corporation” As forecasted, Ameren will still manage to attain a relatively stable and growing net profitability and revenue for the coming years despite of unstable economic situation (see figure 2). Figure 2: Income Statement Evolution Source: “Ameren CRP” In addition, it is projected that by 2012, the company’s annual sales will have a growth rate of 1.25% and its earnings per share during the 2nd and the 3rd quarter of 2011 will increase to $1.14 per share (“Ameren Corp”). This achievement is attributed to the company’s “improved plant operations, a focus on cost management, rate relief in Missouri, a recovering economy boosting industrial sales and installation of emissions reduction equipment (scrubbers) at its generation plants” (“Ameren Corporation (AEE-NYSE” 2). Ameren’s Stock Price (2006-2010) Source: “Ameren Corp” The chart above indicates the stock price performance of Ameren from 2006 to 2010. As seen in the chart, the stock performance is declining from +5.26% in 2006 to -48.44% in 2008 and to +1.79% in 2010 with a 5-year change of -44.76%. For five years, the historical growth rates of Ameren sales (1.1%), earnings per share (-1.1%), dividend (-13.8%) were not impressive. The -48.44% in the stock price had happened during the crash of 2008 event wherein companies and stock exchange worldwide had been exposed to securities cutting of value and fluctuating stock market. The crash of 2008 was brought by global crisis and depth of recession in the U.S. economy which was considered the worst in history (Kumar). Annual Report Ameren 2010 annual report illustrated several achievements and opportunities despite of the emerging economic downturn. The company did a laudable job in terms of its customer service, environmental control, corporate structure and financial performance. The management continuously improved their operational excellence and commitment to give long-term services in all of their business aspects, and assured the people and the economy of their sustainability in the generations to come. In fact, they continued to invest in different infrastructures that would help them serve their customer’s energy needs, they implemented cost management programs and they partnered with major electric energy providers to provide low-cost product/services. In addition, they demonstrated environmental leadership, and provide their shareholders with “attractive return based on a strong dividend and long-term prospects for earnings growth” (“Ameren” 7). However, Ameren is still seeking for higher electric and gas rates from regulatory jurisdictions for them to regain their infrastructure replacement costs and have a growth in their rate base. “As a result, we think that income seeking investors are better suited looking elsewhere for opportunities in the diversified utilities space” (“Morningstar’s Take”). Analysis of Financial Data 1. Liquidity Ratio. The current ratio of Ameren is 1.53% and this is satisfactory considering that it is above the industry average of 1.12%. The figure suggested that the company is liquid for its current assets are capable to alleviate its near-term obligations. 2. Solvency Ratio. Ameren’s quick ratio is 0.96% and this is higher compared to the industry average of 0.73%. This implied that the company has the ability to meet their obligations without putting high reliance on their sales of inventory but on liquid assets. 3. Equity Ratio. The equity ratio of Ameren is 32.87%, and this means that the shareholders’ contribution to the company is about 32% and the remaining 68% is a creditor’s contribution. The company is financially healthy based on the standard equity ratio of 20%. 4. Debt Ratio. The debt ratio of Ameren is 94.61%. The result is greater than 0.5% which means that the company’s assets are financed through debt and not through equity. Ameren is highly leveraged and the level of risk is high particularly during debt repayment, thus it is not safe for investors to invest. 5. Gross Profit Margin. The ratio is 59.29% and it is a company’s advantage because it is above the 50.48% industry median. The higher is the profit margin the higher also is the company’s profitability because it has the ability to pay its additional expenses and future savings. 6. Gross Profit Percentage. The gross profit percentage of Ameren is 59.4R and this is commendable because it is above the trailing twelve months (TTM) average of 59.3%, thus the company is performing better than the industry as a whole. However, a ratio of 59.4% in 2010 is lower than the ratio of 2009 which is 60.5%, thus, the cost of sales of Ameren is overstated and its revenue is understated. 7. Operating Profit Margin. The ratio is 11.99%. The operating profit margin is getting lower considering that in 2007, 2008 and 2009 it has an operating profit margin of 17.78%, 17.37% and 19.97% respectively. This implied that Ameren is not efficient in controlling its cost and expenses making it higher than its gross margin or sales. 8. Book Value. The value of the Ameren’s assets for the fiscal year for 2010 is 7.88 billion. Usually, most companies have higher market capitalization than its book value; however, in Ameren’s case, its book value is higher than its market capitalization which is $6.78 billion. Thus, the expected growth and profitability of the company is still uncertain. 9. Book Value per Share. Ameren’s book value per share is $32.03. This is useful because the current market price or value of Ameren’s share which is $28.06 is traded below the calculated book value per share. Thus, Ameren stock is undervalued and it is attractive to buy for its future performance is expected to be good. 10. Net Profit Margin. 1.42% is the net profit margin of Ameren, and the ratio is below the 5.83% industry average which implied that the company is not generating sufficient sales. Its profit margin for 2008 is 7.72% and 8.63% for 2009 which means that the company needs to further increase the control and management of its operating expenses. 11. Return on Equity. The industry average is 5.97% and Ameren’s ROE is 1.38% only. This only means that the company is not maximizing the yield by generating more profit from the money shareholders have invested. 12. Earnings per Share. This is one of the important ratios that investors should look into before investing money because this will determine financial stability. Ameren has a 0.58% earnings per share and this is the lowest so far compared to the 2.98% in 2007, 2.88% in 2008 and 2.78 in 2009. Thus, the company’s profitability per unit of shareholder investment is low and volatile. 13. Return on Assets. The ROA is 0.46%. The ratio is relatively low compared to the 2.01% industry median, and this suggests that the company is asset heavy and is not profitable for its management is not doing well in terms of allocating resources such as cash. III. Industry Ameren belongs to the industry of energy and utilities. Its primary product/services are electric utilities, energy trading & marketing, independent/merchant power production and natural gas distribution & marketing (“Ameren Corporation”). “The energy industry is currently in a state of restructuring - continued de-regulation, the push for greener renewable sources, and the constant need for investment” (“Solutions”). However, the demand remained stronger and as a result, regulation in environmental impacts is strengthened and utility companies are tasked to improve their operational excellence. The projected revenue and earnings per share for five years (2009-2012) is shown in figure 3. The revenue estimate is good but earnings per share estimate are not performing well. Figure 3: Projected Revenue and EPS Growth (Next 5 Years) Revenue Estimates (In millions of $) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) Year (Dec) 2009 1,916 A 1,684 A 1,815 A 1,675 A 7,090A 2010 1,916 A 1,704 A 2,254 A 1,764 A 7,638 A 2011 1,904 A 1,806 E 2,097 E 1,725 E 7,532 E 2012 1,960 E 7,601 E Earnings Per Share (EPS growth) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) Year (Dec) 2009 $0.54 A $0.75 A $1.16 A $0.34 A $2.79 A 2010 $0.40 A $0.73 A $1.40 A $0.22 A $2.75 A 2011 $0.25 A $0.63 E $1.13 E $0.32 E $2.33 E 2012 $0.25 E $0.20 E Source: “Ameren Corporation (AEE-NYSE)” Impact of Government Control and/or Regulation Deregulation of the energy market had started long before Ameren was formed. In fact, this is the primary reason why shareholders of UE and CIPSCO have decided to merge. The energy and utility industry is surrounded with extensive regulations mostly from government entities, and companies under this industry like Ameren could not act freely with regard to their services and pricing. “Decisions of these entities are influenced by many factors, including the cost of providing services, the prudence of expenditures, the quality of service, regulatory staff knowledge and experience, economic conditions, public policy, and social and political views (“Form 10-K” 5). Most of Ameren’s product/services are regulated that is why they could not easily increase their rate base investment from time to time without the approval of the committee which is outside of their control. Expected Future Demand Figure 4 below shows that the demand for electricity generation will continue to increase with an average growth of 35% in 2035. Figure 4: World Net Electricity Generation by Fuel Source: “International Energy” Economic growth also affects the demand and performance of the industry considering that a sluggish growth of GDP will decrease energy demand as business activity and consumption declined. IV. Market Figure 5 below shows the current information about the financial position of Ameren in the industry. The performance is not that impressive as well as the movement of its stocks in the market. Figure 5: Market Data Factors Ameren Corporation (03-June-2011) a. Current Price $29.07 b. 52 Week High $30.14 c. 52 Week Low $23.45 d. Price/Earning Ratio 64.52 e. Dividend Yield 5.30% f. Market Cap $7,010.20 M g. Beta 0.68 h. Risk Low Risk i. Growth Expectations (60 month) Revenue Growth EPS Growth Dividend Growth 2.41% (28.62%) (9.52%) Source: “Ameren Corporation” Based on the Morningstar stock grades, Ameren receives a growth grade of C, a profitability grade of D and a grade of B for financial health (“Snapshot: Ameren Corporation”). In other words, Ameren’s growth is at the middle of the sector, it is financially healthy but a poor performer in terms of profitability. V. Economy The United States is one of the largest and richest economies in the world with GDP of US$14,660 billion in 2010 with an annual growth rate of 2.80%, a 0.25% interest rate and 2.10% inflation rate (“Rank Countries”). It is projected that by 2014, the GDP will increase to US$17,782 billion as its components continue to increase (see figure 6). Figure 6: U.S. GDP Source: “Total Budgeted” Figure 7 below shows the comparison of shareholder returns between S&P, EEI Index and Ameren from 2005 to 2010. It is very evident that among the three, Ameren common stock has the lowest performance because it has the smallest cumulative total return. Figure 7: Performance Graph Dec. 31 2005 2006 2007 2008 2009 2010 Ameren $100 $110.11 $116.65 $76.30 $68.13 $72.80 S&P 500 Index 100 115.79 122.15 76.95 97.31 111.97 EEI Index 100 120.76 140.76 104.30 15.47 123.60 Source: “Form 10-K” 30 VI. Recommendations Overall, the performance of Ameren stock is low, despite of the company’s stable earnings and revenue, strong balance sheet and cost minimization. If the investor would invest in Ameren, it could not expect a greater return because the value of the company’s stock decreases. Even though the market is in upward trend and the demand for energy and utility industry is increasing, it is not an assurance that buying an Ameren stock would be a good idea. Based on ratio analysis, the company is not liquid, its growth and profitability is uncertain and it needs to increase the control and management of its expenses. The most important to consider is the annual earnings wherein the five year growth forecast for Ameren is -1.0% (industry average: 8.4%). The industry is also highly regulated and their profitability highly depends on economic stability and weather conditions. Therefore, investing in the stock market under Ameren is risky. On the other hand, the economy is starting to recover and the regulatory committees are approving one by one the pending regulatory cases and rate base increase of Ameren. Also, the company’s balance sheet is financially healthy considering that its long-term debt and debt to capitalization is above the industry average and this shows that the company starting to generate more cash. The management also increased their shareholders’ investment return and offered a higher dividend yield in 2010 despite of the ongoing economic downturn. In a total of 9 analyst, none of them said to “buy” stock in Ameren while 7 have recommended to “hold” and 3 have recommended to “sell” the stock (“Snapshot: Ameren Corporation”). However, securities analysts could not foresee everything, thus, their interpretations could sometimes be wrong, that is why before complying their recommendations should be validated first. Works Cited “Ameren.” 2010 Annual Report. Thomson Reuters. Thomson Reuters, n.d. Web. 15 June 2011. . “Ameren Corp.” CNN Money. Time Warner Company, n.d. Web. 15 June 2011. . “Ameren Corporation.” Hoovers. Hoover’s Inc., n.d. Web. 15 June 2011. . “Ameren Corporation (AEE-NYSE).” Zacks Investment Research. Zacks Investment Research, 12 May 2011. Web. 15 June 2011. . “Ameren CRP: Ameren Illinois Company Directors Declare Preferred Dividend.” 4-Traders. Surperformance SAS, 29 Oct. 2010. Web. 16 June 2011. . “Ameren Facts and Figures.” Ameren. Ameren Services, n.d. Web. 15 June 2011. . “Ameren Stock Price AEE.” ADVFN Asia. ADVFN Plc, 15 June 2011. Web. 15 June 2011. . “Form 10-K.” Securities and Exchange Commission. Securities and Exchange Commission, n.d. Web. 15 June 2011. . “International Energy Outlook 2010 - Highlights.” U.S. Energy Information Administration. U.S. Department of Energy, May 2011. Web. 16 June 2011. . Kumar, Phani V. “Indexes fall hard on bloody Friday.” Market Watch. The Wall Street Journal, 24 Oct. 2008. Web. 15 June 2011. . “Morningstar’s Take AEE.” Morningstar. Morningstar Inc., n.d. Web. 16 June 2011. . “Our Businesses.” Ameren. Ameren Services, n.d. Web. 14 June 2011. . “Rank Countries.” Trading Economics. Trading Economics, n.d. Web. 16 June 2011. . “Snapshot: Ameren Corporation.” Morningstar. Morningstar Inc., n.d. Web. 16 June 2011. . “Solutions for the Energy and Utilities Industry.” Prophix Software. Prophix Software, n.d. Web. 16 June 2011. . Stagen, Brian P. “An Analysis of Central Illinois Public Service Company.” Management Quarterly 38.2 (1997): 30+. Print. “Total Budgeted Government Spending: Expenditure GDP.” US Government Spending. US Government Spending.com., n.d. Web. 16 June 2011. . Read More