Analyst Gregg Orrill from UBS has downgraded shares of AES (ticker: AES) to Neutral from Buy and has also lowered the price target on the stock to $13 from $22. This downgrade was prompted by Orrill's concerns about the impact of higher interest rates on the utility company's near-term future.
On Friday, AES experienced a significant decline of 4.6%, with its stock price dropping to $12.03, making it the worst performer in the S&P 500. In fact, this was on track to be its lowest close since May 2020, as reported by Dow Jones Market Data.
Orrill cited rising interest rates and earnings deceleration at the Infrastructure segment resulting from coal shutdowns as the main reasons for the downgrade. AES had previously announced its plan to exit coal by the end of 2025, which has affected their Infrastructure segment negatively.
According to Orrill, higher interest rates will pose a challenge to the returns on new business, especially if these increased financing costs are not passed along in power prices. Despite the benefits of the Inflation Reduction Act (IRA) coming into full effect in 2024, which provides tax credit bonuses to certain renewable energy projects, Orrill believes that renewable developers will still face the impact of higher financing costs on new projects.
This year alone, AES's stock has fallen by 60%.