Datacenter – Fountainheadinvesting

AES Corp (AES) $16.85 (Utility, decent dividend yield) Can buy on declines or accumulate don’t expect more than 7%-8% per year, though datacenter operations could be a nice surprise.

Flat for a long time – 10 years the stock returned just 12%, it is down 12% in the past year. Revenues and operating earnings also went nowhere during the same time, selling some legacy coal, and switching to renewable energy,

Earnings growth for the next three years is estimated at 8%, revenue at 4%.

The 4% dividend yield is interesting

BBB debt rated – middle of the pack, most utility dividend investors would prefer at least BBB+.

Core player in the renewable sector, with a growing 25-30 GW portfolio of solar power until 2027 – The trend towards renewable energy helps them.

Expected demand from Datacenters- Some of the company’s major customers include Amazon, Microsoft and Google, major IT businesses, all of whom have Co2-neutral commitments to their operations by 2030 or earlier – and the company’s backlog is over 40% with customers that are large tech companies.

Transitioning from coal and gas-fired power plants to renewables and storage and still has impairment losses due to the coal exit.

Low margins – not efficient, compared to its competitor Brookfield Renewables, AES has a lower dividend yield and a lower EBITDA margin.

These are still high debt levels. $26.5B net debt equals more than two times the current market cap, about eight times the adjusted 2023 EBITDA, and about 26 times the 2023 free cash flow. Three peers BEP, AY and TEC have lower debt ration – some at slightly higher rates but this will improve once rates go down.

Lumen Tech (LUMN) $5.50 Cyclical,

Stock has appreciated a lot this year, 220%, but 5- year and 10-year stock returns were negative, because as a Fiber Network Telco – it was a cyclical, commodity, capital intensive, high debt, low margin business. Sales have declined in the last 10 years by 21%.

What is different now – Corning and Microsoft has helped it stave off bankruptcy, its debt load was too high for it to sustain its business, otherwise.

Lumen’s partnership with Corning for fiber network expansion will support business growth and increased free cash flow forecast for 2024; this may lead to debt rating upgrade and improved growth. Markets responded enthusiastically to the news, since Lumen significantly increased its capacity to key cloud data centers. AI has heavy workloads and uses high bandwidth applications since it involves massive amounts of data.

They have a similar customer supply deal with Microsoft.

I tend to avoid commodity cyclicals because they don’t have sustainable, recurring growth, you have to constantly watch over your shoulder, and in Telecom and Networks capital requirements are usually very high. Plus, in Lumen’s case the stock has jumped for a bottom of $1, so much of the good news is in the price. If you decide to buy on a dip, you may get a solid bump for a year or two, but not a long-term great company. High Risk/High Reward for a year. If they continue to get more deals and AI network expansion continues yes this could be a good deal, but this industry is intensely competitive and price sensitive.