Unpacking This Utility Stock's Recent Hot Streak

American Electric Power will report earnings on April 22

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On April 19, utility concern American Electric Power Company, Inc. (NASDAQ:AEP) signed an agreement with the Crown Battery Manufacturing Company to provide clean energy through an integrated renewable energy solution. AEP Energy will supply the company with clean energy through a long-term, fixed price retail energy option that supports new, locally sourced wind and solar energy. The deal will last more than 12 years beginning in January of 2023.

American Electric Power is also scheduled to release quarterly earnings results on Thursday, April 22. In recent history, AEP has outperformed earnings expectations on two of the last four earnings reports released. However, the stock's post-earnings reactions have been quite muted; it averages a 1.6% move, regardless of direction, in the last eight quarters.  

On the charts, AEP is up 6.5% in 2021, and bounced off the $75 level it breached back in February. Last seen trading at $89.32, its recent positive price action has stretched its 14-Day Relative Strength Index (RSI) up to 73, firmly in overbought territory. American Electric Power also offers a $2.96 forward dividend, which is equivalent to a dividend yield of 3.34%.

From a fundamental perspective, American Electric Power has some major deficiencies. Starting off with the biggest issue, AEP has racked up a massive $34.72 billion in debt, which is especially concerning when compared to total cash available. American Electric Power has just $593.5 million in cash on its balance sheet. Moreover, revenues have been declining since 2018, despite a 15% net income increase in 2020. In 2020, AEP's revenues fell more than 4% and have decreased 8% in the past 2 years. American Electric Power stock has also reached a high valuation, and now trades at a price-earnings ratio of 20.06. Even with a forward price-earnings ratio of 18.90, AEP just has too much risk involved to justify its current value for potential investors.

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