American Electric Power Co Inc (AEP)

Conclusion

American Electric Power is a regulated electric utility holding company in the United States. It generates, transmits and distributes electricity to retail and wholesale customers, and is headquartered in Columbus, Ohio. On 2026-11-09 the share price was 128.33 USD, giving a market capitalisation of 69.9 billion USD.

The verdict is undervalued. Today's P/E of 20.8 sits above its ten-year median of 18.7, a premium of 11.4%, and EV/EBITDA of 13.7 sits above its median of 12.2, a premium of 12.7%. The DCF gives 225.87 USD per share at a discount rate of 8.87%. The fair value band runs from 134.93 to 202.40 USD with a midpoint of 168.66 USD, a margin of safety of 31.4% at the current price. The fair value from historical multiples is 111.46 USD. The reverse DCF implies growth of -1.8% a year, while revenue actually grew at a 5-year CAGR of 7.9%.

What supports the case is a 28.6% operating margin against a ten-year median of 20.4%, a Piotroski score of 7 out of 9, and an EPS CAGR of 9.2% over five years. What could break it is weak balance-sheet strength: an Altman Z-score of 0.90, net debt to EBITDA of 6.0x, and interest coverage of 2.3x. Returns are also thin, with ROIC of 5.8% against a WACC of 7.0%.

Financial health

Financial strength is red, because four metrics are assessed as bad and none as good. The current ratio is 0.51 and the quick ratio is 0.27, so short-term liabilities far exceed liquid assets. Net debt to EBITDA is 6.0x, debt to equity is 1.68, and interest coverage is 2.3x. The Altman Z-score is 0.90, in the distress zone. The Altman model was designed for manufacturers, so this reading is only indicative for a utility. Insolvency risk is low, at about 1.0% by the estimate of the Ohlson model over one to two years, based on figures as of 2025-12-31.

Earnings quality

Earnings quality is yellow: the Piotroski score is good, while free cash flow conversion over five years is bad. Trailing conversion is 179.0%, but the five-year figure is -0.4%, so the trailing number is not yet a stable pattern. The accrual ratio is -3.1%. The stock-based compensation figure is not available, so the company's free cash flow after stock-based compensation is shown only as 6.0 billion USD. The share count has grown at a 5-year CAGR of 0.9%, so the company has not been buying back shares. The Beneish M-score is not available. Over the last eight quarters, earnings beat estimates five times and missed three times, with an average surprise of 3.9%. Current-year estimates rose 1.2% over 90 days, with ten upward and one downward revision in the last 30 days.

Profitability

Profitability is green. The gross margin is 42.9% against a ten-year median of 28.3%, the operating margin is 28.6% against 20.4%, and the net margin is 14.4% against 12.4%. Operating margin stability is 12.1%. The key weakness is return on capital: ROIC is 5.8% against a WACC of 7.0%, a ROIC minus WACC of -1.2%, which is neutral. The five-year median ROIC is 6.1%. Return on equity of 10.2% is flattered by leverage. On the 2025 DuPont split, the net margin is 16.4%, the asset turnover is 0.19, and the equity multiplier is 3.77.

Growth

Growth is yellow, with one good metric and three neutral ones. Revenue compounded at 4.1% over three years, 7.9% over five years and 2.9% over ten years. EPS compounded at 15.3% over three years, 9.2% over five years and 5.1% over ten years. Revenue grew in six of the ten comparable years. Free cash flow per share shows a ten-year CAGR of 40.2%, but that figure rests on a low base and is not representative of a steady trend. Next year's EPS growth estimate is 6.8%, which is close to the five-year revenue pace.

Valuation

Valuation is green. Against their ten-year medians, the P/E is 20.8 versus 18.7, a premium of 11.4%. EV/EBITDA is 13.7 versus 12.2, a premium of 12.7%. Price to sales is 3.0 versus 2.5, a premium of 19.2%. Price to book is 2.1 versus 1.9, a premium of 9.5%. Price to free cash flow is 11.6, but there is too little history to form a median. The DCF is 225.87 USD per share at a discount rate of 8.87%, with the terminal value making up 57.2% of it. The fair value band is 134.93 to 202.40 USD, a midpoint of 168.66 USD and a margin of safety of 31.4% at 128.33 USD. These fair values are order-of-magnitude estimates built on fixed assumptions, including a 5% equity risk premium and capped growth, not price targets. The reverse DCF implies growth of -1.8%, against 7.9% revenue growth over five years. The dividend yield is 3.0%, the forward yield is 3.1%, and the payout on free cash flow is 34.4%.

Risks

The main risk is leverage. Net debt to EBITDA of 6.0x and interest coverage of 2.3x leave little room for higher rates or weaker earnings. A current ratio of 0.51 means the company depends on continuous access to funding. Returns below the cost of capital, with ROIC at 5.8% against a WACC of 7.0%, mean that growth adds limited value unless returns improve. Five-year free cash flow conversion of -0.4% shows that cash generation has lagged reported earnings over time. Values not available include stock-based compensation, the Beneish M-score and a price-to-free-cash-flow median. This analysis has no debt maturity schedule and no revenue split by segment, so it cannot show when debt must be refinanced or which businesses drive growth.