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On Thursday, Jefferies analyst firm downgraded AES Corp (NYSE:AES) stock rating from Buy to Hold and significantly reduced the price target to $10.00 from the previous $15.00. The adjustment comes as the firm adopts a more cautious stance on AES's growth prospects and financial position, noting a weaker balance sheet than previously recognized. InvestingPro data confirms these concerns, showing a debt-to-equity ratio of 8.33x and a current ratio of 0.8, indicating significant leverage and potential liquidity challenges.
The downgrade reflects concerns about the company's ability to attract investor interest due to its complex international ownership structure, despite having some protection from tariffs through its domestic strategy. Jefferies highlighted that while AES's strategy includes leveraging large Investment Tax Credits ( ITC (NSE:ITC)) from the Inflation Reduction Act (IRA), the firm has only secured these assets up to 2027. The stock has struggled recently, with InvestingPro showing a significant 34% decline over the past six months.
Jefferies pointed out that AES's international operations and the overall complexity of its business model are contributing factors that may deter investors at this time. The analyst firm believes that these elements, combined with the balance sheet considerations, warrant a more conservative investment rating. Despite these challenges, InvestingPro data reveals the stock trades at an attractive P/E ratio of 4.6x, suggesting potential value for investors willing to navigate the complexities. Get access to 8 more exclusive InvestingPro Tips and comprehensive analysis in the Pro Research Report.
The revised price target of $10.00 represents a notable decrease from the previous target, indicating a significant shift in the firm's valuation of AES stock. This new target is set amidst the backdrop of the company's strategic reliance on IRA tax credits for growth.
The analyst's comments emphasize the importance of AES's domestic strategy and the benefits it could reap from tax credits. However, the firm also recognizes the limitations of this approach, considering the safe-harboring of assets is confirmed only through 2027, which may impact long-term growth potential.
In other recent news, AES Corporation announced plans to issue senior notes in a public offering to manage its debt, including repurchasing its 3.300% Senior Notes due in 2025. The proceeds will also be used for other corporate purposes, and the offering will be managed by several financial institutions, including Citigroup (NYSE:C) Global Markets Inc. and BNP Paribas (OTC:BNPQY) Securities Corp. Additionally, AES Corp will restate its financial results for the second and third quarters of 2024 due to an overstatement of impairment expenses related to its stake in AES Brasil Energia S.A. This restatement does not impact previously reported revenues or net income.
Furthermore, Mizuho (NYSE:MFG) Securities reiterated their Outperform rating for AES with a $15 price target, following discussions with the company's CFO about strategic initiatives and financial goals. BofA Securities upgraded AES's stock rating from Underperform to Neutral, raising the price target to $13, citing improved execution visibility and strategic adjustments. These include reducing capital spending by $1.3 billion and cutting costs by $300 million, which are expected to support a 5-7% EBITDA growth rate through 2027. Despite these positive developments, BofA Securities noted potential challenges, such as funding constraints and the risk of a future equity raise.
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