American Electric Power knows the dip in electricity demand is temporary

Posted May 4th 2009 7:30PM by Joseph Lazzaro
Filed under: Stocks to Buy

Readers of this space know that one of the preferred sectors is the electric power generation sector.

And it's preferred for a reason that may not be obvious to all. Electricity via win, solar, and nuclear generation is likely to play a large role in energy as climate change reduction, then elimination, becomes a societal goal. Electricity also remains a potential propulsion source for cars, particularly once oil resumes its inevitable clime. And with the above in mind, electric power generator American Electric Power (NYSE: AEP) is worth a review.

American Electric seeks to deliver low-cost electric power to the communities it serves: roughly 5 million customers in 11 states (including Ohio, Virginia, Indiana, Oklahoma), which account for more than 50% of FY 2009 revenue. Wholesale power sales accounted for about 20% of FY 2009 revenue. The First Call FY 2009/FY 2010 EPS estimates for AEP are $2.83 to $3.03.

In general, analysts expect the dip in retail electric demand to end in FY 2009, and that fact, combined with a decline in operating/maintenance costs, and little impact from greenhouse gas legislation until about 2015 or 2020, make AEP a bargain at a p/e of 8.

Stock Analysis: American Electric Power is a moderate-risk stock. Consider buying a 25% position in AEP now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your AEP position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $12.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: AEP, American Electric Power