AES Follow Up

AES reported very strong earnings yesterday. I provided a detailed update on AES in April after its year-end conference call in which management provided a tepid outlook for 2006. However, after yesterday's conference call, management was much more upbeat after a strong first quarter.

• International financial markets are finally willing to open up lending to AES-type of projects which are often located in emerging markets. It has been difficult getting deals financed during the last five or six years.
• Pricing and volume mix are good in many markets.
• AES continues to show it has built itself into a nice free cash flow machine.
• New construction prospects are picking up.

Despite the huge run up in emerging-economy stock markets during the last few years, the available financing for greenfield type of projects that AES normally does is just opening up. I mentioned in the April blog that 2006 earnings would be flat as it reinvests for growth in 2007 and going into 2008, but it appears 2006 might be OK. In addition, it appears management has greater confidence in its ability to complete some large projects during the next few years which will support management's outlook for double-digit earnings growth.

After the year-end conference call, it appeared that this stock might be dead money until the fall, but with Monday's earnings release and the announcement of some big projects, investors will have to get back into this stock now.