We issued an updated research report on Ameren Corporation AEE on May 22. The company started off 2017 on a mixed note. While first-quarter earnings declined year over year,  revenues increased significantly. On the other hand, cash from operating activities decreased from the prior-year quarter.

In 2014, the U.S. Environmental Protection Agency gave its final verdict for climate policy, under which, carbon pollution from power plants are needed to be reduced 32% by 2030 from 2005 levels. Consequently, utility providers like Ameren, who still rely on fossil fuel mostly to provide electricity to customers, need to make huge investments to comply with the new law. This, in turn, may impact their profitability.

A comparative analysis of Ameren’s historical EV/EBITDA ratio reflects a relatively gloomy picture that might be a cause for its investors’ concern.  Evidently, the stock is overvalued with a current trailing 12-month EV/EBITDA ratio of 9.18, which is much higher than the average level of 8.98. It is also higher than the broader industry’s EV/EBITDA ratio of 8.82 over the last one year.

Moreover, the company faces intense competition from other utilities in the Utility-Electric Power industry like Pampa Energia S.A. PAM and CenterPoint Energy, Inc. CNP.

On a brighter note, Ameren operates a rate-regulated business and has a stable earnings base, serving 2.4 million electric customers and more than 900,000 natural gas customers in a 64,000-square-mile area. The company’s stable financial position allows it to maximize shareholder value through the payment of regular dividends. Notably, the company paid dividends of $107 million in the first quarter, up from $103 million in the year-ago period.

Going forward, management believes that the company’s strong rate base and earnings growth profile, combined with solid dividend, will provide a yield of approximately 3.2%. This, in turn, might result in an attractive total return opportunity for its shareholders.

Ameren Corporation Price and Consensus

Ameren Corporation Price and Consensus | Ameren Corporation Quote

Zacks Rank

Ameren currently carries a Zacks Rank #4 (Sell). A better-ranked stock from the same space is NiSource, Inc. NI.

NiSource sports a Zacks Rank #2 (Buy). The company’s long-term EPS growth rate is pegged at 6.5%, higher than the industry level of 5.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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