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- By GF Value

The stock of American Electric Power Co (NAS:AEP, 30-year Financials) is estimated to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $84.99 per share and the market cap of $42.2 billion, American Electric Power Co stock is estimated to be fairly valued. GF Value for American Electric Power Co is shown in the chart below.

• Warning! GuruFocus has detected 10 Warning Signs with AEP. Click here to check it out.

• AEP 15-Year Financial Data

• The intrinsic value of AEP

• Peter Lynch Chart of AEP

Because American Electric Power Co is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which is estimated to grow 1.18% annually over the next three to five years.

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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. American Electric Power Co has a cash-to-debt ratio of 0.02, which ranks worse than 89% of the companies in the industry of Utilities - Regulated. Based on this, GuruFocus ranks American Electric Power Co's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of American Electric Power Co over the past years:

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. American Electric Power Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $14.9 billion and earnings of $4.42 a share. Its operating margin is 20.03%, which ranks better than 67% of the companies in the industry of Utilities - Regulated. Overall, the profitability of American Electric Power Co is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of American Electric Power Co over the past years:

Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of American Electric Power Co is -1.4%, which ranks worse than 76% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth rate is 1.8%, which ranks in the middle range of the companies in the industry of Utilities - Regulated.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, American Electric Power Co's ROIC is 3.63 while its WACC came in at 3.31. The historical ROIC vs WACC comparison of American Electric Power Co is shown below:

To conclude, The stock of American Electric Power Co (NAS:AEP, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Utilities - Regulated. To learn more about American Electric Power Co stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.