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    Thursday, February 05, 2004

    AES Value

    Since my first post on AES I have continued to track them and become more bullish. The stock has trippled and probably has another double left in it. They reported their earnings for 2004 and conducted their investors conference call today. Their financial information and disclosures are the best of all the companies I've invested in. They forecast earnings of 69c in 2004 along with 23% + growth 5 years out. Building a model with that 5 year data, 10% over the next 5 years and then GDP growth, along with a 17% discount rate (cost of equity today) down to 12% at GDP growth, gives a value above $16. If you build a more complex model it is even a little higher.

    There is another security issued by AES, a trust preferred offering a 7-8% yield as well as a couple of call options on the AES common. This just got upgraded by S&P to CCC+ with a stable rating from a negative outlook. I went to see what this meant in terms of default risk and came across an interesting article on measuring default risk based on ratings link. It identified the probability of default over 5 years at 58.5%. This is very much higher than I expected. Even a B rated security has a 25% risk of default over 5 years. Their approach seems pretty solid which leads me to believe that S&P is way off with their ratings. That isn't so surprising given all the misses they had over the last few years with highly rated securities defaulting.

    A Tax deferred Security Yielding 6%, offering significant growth
    I wouldn't have believed this until I read this article on Master Limited Partnerships. These are practically the ideal security with low management risk (forced to distribute almost all earnings), great tax treatment and great growth potential. Interestingly mutual funds can't own them today but if Bush's Energy bill gets passed they may be able to. That could cause a lot of demand, I expect some of these will be a market beating proposition.
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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