Why AES Corp. Stock Popped Today

Key Points

• Brookfield and BlackRock may want to buy AES.

• AES stock is down sharply over the past year, but its power may be in demand for AI data centers.

• AES is profitable, but it carries a lot of debt, and does not generate positive free cash flow.

• 10 stocks we like better than The AES Corporation ›

For two weeks straight, shares of electric utility AES Corp. (NYSE: AES) stock have climbed, all on no obvious news -- but today we found out why this stock was hopping. As Barron's reports, AES is "exploring its options, including a possible sale" to one or several "large investment firms."

And so, after two weeks of steady gains, AES took another leap higher this morning, soaring 16% through 10:10 a.m. ET.

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Image source: Getty Images.

Who's buying AES?

Bloomberg News reports that two investment firms may bid to buy AES: Brookfield Asset Management and BlackRock's Global Infrastructure Partners. And why would they want it?

For one thing, AES is viewed as a play on rising demand for electricity to power artificial intelligence data centers. For another, despite its recent, mysterious gains, AES stock remains down 38% over the past year.

Is AES stock a buy?

It makes sense that with AES stock so much cheaper than it once was, mergers and acquisitions specialists might begin wondering if AES is cheap enough to buy. And valued at just 6 times trailing earnings and only 5 times forward earnings, AES stock certainly looks cheap.

But just in case a buyout does not happen, beware: This cheapness comes with caveats.

First and foremost, AES carries a boatload of net debt, nearly $30 billion worth. That's enough to push the stock's $7.9 billion market capitalization up to $37.3 billion when calculated as enterprise value. Relative to the $1.3 billion AES earned over the past year, that means the stock trades for a steep enterprise value of 27 times earnings. The stock's even pricier when valued on free cash flow... of which it has none.

This may not frighten off Brookfield and BlackRock, but it does worry me.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.