The AES CorporationAESNYSE
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DCF Valuation
DCF Valuation Summary
Strong Buy
Fair Value: $27.58 per share(market-calibrated)
+94.5%
Upside to Fair Value
Current
$14.18
Pure Model
$28.19
Fair Value
$27.58
Bull Case
$32.42
Bear Case
$24.05
Market Reality Check
Model Terminal Growth
2.00%
Market-Implied Growth
0.69%
Calibrated Growth
1.54%
Fair value uses 65% model / 35% market-implied terminal growth. Pure model: $28.19.
What's Driving This Ratingfor AES
↓
CapEx normalizing toward maintenance
Historical CapEx is 45.31% of revenue (heavy investment phase). Model fades this to 5.00% by Year 10, freeing up ~$5.7B in annual FCF. This is the biggest driver of long-term cash flow improvement.
✓
Premium margins already priced in
EBIT margin of 28.97% is already well above sector average. The model holds this level — there's limited room for margin expansion to drive upside. Valuation depends primarily on revenue growth.
→
Moderate revenue growth
Analyst consensus projects 2.49% revenue growth, fading to 2.00% by Year 10. Revenue reaches $14.2B (vs $12.2B today).
↔
Perpetuity and exit methods disagree
Perpetuity growth gives $17.38/share (11.6x terminal FCF) while exit multiple gives $39.00/share (22.6x terminal FCF). The 16x EV/EBITDA exit reflects current market multiples, while the perpetuity method with 2.00% growth is more conservative. The base case averages both methods.
🎯
Market pricing in lower growth than model
The market implies only 0.69% perpetual growth — 131bps below the model's 2.00%. This suggests the market sees headwinds or risks not in the model.
✓
Strong cash flow conversion
Year 10 FCF/EBITDA conversion of 70.89% indicates efficient cash generation. FCF reaches $3.9B by Year 10 (27.44% FCF margin).
Weighted Average Cost of Capital (WACC)
Cost of Equity (CAPM)
Risk-Free Rate (Rf)4.50%
Beta (β)0.94
Market Risk Premium4.50%
*Using current implied premium (4.5% per Damodaran 2026), not historical (6.5%)
Cost of Equity (Re)8.71%
Cost of Debt
Pre-tax Cost of Debt17.60%
Tax Rate21.00%
After-tax Cost of Debt13.90%
Equity Weight (E/V)59.25%
Debt Weight (D/V)40.75%
WACC Calculation
WACC = (E/V × Re) + (D/V × Rd × (1-Tc))
WACC = (59.25% × 8.71%) + (40.75% × 13.90%)
= 10.83%
10-Year Free Cash Flow Projections(showing years 1, 3, 5, 7, 10)
| Year | Year 1 | Year 3 | Year 5 | Year 7 | Year 10 |
|---|---|---|---|---|---|
| Revenue | $12.5B | $12.4B | $12.9B | $13.4B | $14.2B |
| EBIT | $3.6B | $3.6B | $3.7B | $3.9B | $4.1B |
| Tax | $763M | $754M | $784M | $816M | $866M |
| NOPAT | $2.9B | $2.8B | $3.0B | $3.1B | $3.3B |
| + Depreciation | $1.2B | $1.2B | $1.3B | $1.3B | $1.4B |
| - Capex | $5.7B | $4.5B | $3.5B | $2.5B | $712M |
| - Δ NWC | $29M | -$38M | $24M | $25M | $26M |
| Free Cash Flow | -$1.6B | -$424M | $651M | $1.9B | $3.9B |
| Discount Factor | 0.902 | 0.735 | 0.598 | 0.487 | 0.358 |
| Present Value | -$1.5B | -$312M | $389M | $915M | $1.4B |
FCF Formula: Free Cash Flow = NOPAT + Depreciation - Capex - Change in Net Working Capital
Terminal Value Calculation
Perpetuity Growth Method
Year 10 FCF$3.9B
Terminal Growth Rate2.00%
WACC10.83%
TV = FCF₁₀ × (1+g) / (WACC-g)
Terminal Value$45.2B
PV of Terminal Value$16.2B
Exit Multiple Method
Year 10 EBITDA$5.5B
Exit Multiple (EV/EBITDA)16.0x
TV = EBITDA₁₀ × Exit Multiple
Terminal Value$88.2B
PV of Terminal Value$31.5B
Valuation Summary
Perpetuity Growth Method
PV of Projected FCFs$3.2B
PV of Terminal Value$16.2B
Enterprise Value$19.3B
(-) Net Debt$6.9B
Equity Value$12.4B
Shares Outstanding712M
Price per Share$17.38
Exit Multiple Method
PV of Projected FCFs$3.2B
PV of Terminal Value$31.5B
Enterprise Value$34.7B
(-) Net Debt$6.9B
Equity Value$27.8B
Shares Outstanding712M
Price per Share$39.00
Pure Model Fair Value
$28.19
Average of perpetuity growth and exit multiple methods (before market calibration)
Sensitivity AnalysisPrice per Share
| WACC ↓ / Growth → | 1.00% | 1.50% | 2.00% | 2.50% | 3.00% |
|---|---|---|---|---|---|
| 8.83% | $37.66 | $38.78 | $40.06 | $41.54 | $43.28 |
| 9.83% | $31.81 | $32.62 | $33.52 | $34.55 | $35.73 |
| 10.83% | $26.94 | $27.53 | $28.19 | $28.93 | $29.77 |
| 11.83% | $22.80 | $23.25 | $23.74 | $24.29 | $24.90 |
| 12.83% | $19.24 | $19.59 | $19.96 | $20.38 | $20.83 |
How to read: This table shows how the valuation changes with different WACC (discount rate) and terminal growth rate assumptions. Green = undervalued, Red = overvalued.
Scenario Analysis
Bear Case
$24.05
69.6% vs current
- • -25% vs analyst consensus
- • Terminal growth: 2.0%
- • Beta: 1.17
Base Case
$28.19
98.8% vs current
- • Analyst consensus
- • Terminal growth: 2.0%
- • Beta: 0.94
Bull Case
$32.42
128.6% vs current
- • +25% vs analyst consensus
- • Terminal growth: 2.5%
- • Beta: 0.80
Key Assumptions & Drivers• Utilities Sector
Growth Assumptions (Select Years)
Year 1 Revenue Growth2.49%
Year 3 Revenue Growth-3.14%
Year 5 Revenue Growth2.00%
Year 7 Revenue Growth2.00%
Year 10 Revenue Growth2.00%
Terminal Growth Rate2.00%
Margin & Efficiency
Current EBIT Margin28.97%
Tax Rate21.00%
Historical Capex / Rev45.31%
Terminal Capex / Rev5.00%
NWC / Revenue9.41%
Key Drivers: Revenue growth, operating margin expansion, capex efficiency, and working capital management are the primary drivers of cash flow generation. Terminal value assumptions significantly impact final valuation.
Institutional-Grade Methodology
Actual Company Data: Revenue, EBIT, Capex, NWC, Tax Rate, Interest Expense, Beta
Market Assumptions: Risk-free: 4.5% (10Y), MRP: 4.5% (Damodaran 2026), Exit: 16x EV/EBITDA (Utilities sector)
This DCF model is for informational purposes only. Projections are based on assumptions that may not materialize. Past performance does not guarantee future results. Consult a financial advisor before making investment decisions.