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Enron Mail |
A colleague has sent you this article from Fortune (http://www.fortune.com)=
. Reply to your colleague at george.kneisley@enron.com I believe this is the article=3D=3D=3D =3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D-=3D ENRON Is Enron Overpriced? It's in a bunch of complex businesses. Its financial statements are nearly= =20 impenetrable. So why is Enron trading at such a huge multiple? Bethany McLean Mon Mar 05 00:00:00 EST 2001 In Hollywood parlance, the "It Girl" is someone who commands the spotlight= =20 at any given moment--you know, like Jennifer Lopez or Kate Hudson. Wall=20 Street is a far less glitzy place, but there's still such a thing as an "I= t=20 Stock." Right now, that title belongs to Enron, the Houston energy giant.= =20 While tech stocks were bombing at the box office last year, fans couldn't= =20 get enough of Enron, whose shares returned 89%. By almost every measure, t= he=20 company turned in a virtuoso performance: Earnings increased 25%, and=20 revenues more than doubled, to over $100 billion. Not surprisingly, the=20 critics are gushing. "Enron has built unique and, in our view, extraordina= ry=20 franchises in several usiness units in very large markets," says Goldman= =20 Sachs analyst David Fleischer.=20 Along with "It" status come high multiples and high expectations. Enron no= w=20 trades at roughly 55 times trailing earnings. That's more than 2 1/2 times= =20 the multiple of a competitor like Duke Energy, more than twice that of the= =20 S=02?500, and about on a par with new-economy sex symbol Cisco Systems. En= ron=20 has an even higher opinion of itself. At a late-January meeting with=20 analysts in Houston, the company declared that it should be valued at $126= a=20 share, more than 50% above current levels. "Enron has no shame in telling= =20 you what it's worth," says one portfolio manager, who describes such=20 gatherings as "revival meetings." Indeed, First Call says that 13 of Enron= 's=20 18 analysts rate the stock a buy.=20 But for all the attention that's lavished on Enron, the company remains =20 largely impenetrable to outsiders, as even some of its admirers are quick = to=20 admit. Start with a pretty straightforward question: How exactly does Enro= n=20 make its money? Details are hard to come by because Enron keeps many of th= e=20 specifics confidential for what it terms "competitive reasons." And the=20 numbers that Enron does present are often extremely complicated. Even=20 quantitatively minded Wall Streeters who scrutinize the company for a livi= ng=20 think so. "If you figure it out, let me know," laughs credit analyst Todd= =20 Shipman at S&P. "Do you have a year?" asks Ralph Pellecchia, Fitch's credi= t=20 analyst, in response to the same question.=20 To skeptics, the lack of clarity raises a red flag about Enron's pricey =20 stock. Even owners of the stock aren't uniformly sanguine. "I'm somewhat = =20 afraid of it," admits one portfolio manager. And the inability to get behi= nd=20 the numbers combined with ever higher expectations for the company may=20 increase the chance of a nasty surprise. "Enron is an earnings-at-risk=20 story,'' says Chris Wolfe, the equity market strategist at J.P. Morgan's= =20 private bank, who despite his remark is an Enron fan. "If it doesn't meet= =20 earnings, [the stock] could implode."=20 What's clear is that Enron isn't the company it was a decade ago. In 1990= =20 around 80% of its revenues came from the regulated gas-pipeline business.= =20 But Enron has been steadily selling off its old-economy iron and steel=20 assets and expanding into new areas. In 2000, 95% of its revenues and more= =20 than 80% of its operating profits came from "wholesale energy operations a= nd=20 services." This business, which Enron pioneered, is usually described in= =20 vague, grandiose terms like the "financialization of energy"--but also, mo= re=20 simply, as "buying and selling gas and electricity." In fact, Enron's view= =20 is that it can create a market for just about anything; as if to underscor= e=20 that point, the company announced last year that it would begin trading=20 excess broadband capacity.=20 But describing what Enron does isn't easy, because what it does is =20 mind-numbingly complex. CEO Jeff Skilling calls Enron a "logistics company= "=20 that ties together supply and demand for a given commodity and figures out= =20 the most cost-effective way to transport that commodity to its destination= .=20 Enron also uses derivatives, like swaps, options, and forwards, to create= =20 contracts for third parties and to hedge its exposure to credit risks and= =20 other variables. If you thought Enron was just an energy company, have a= =20 look at its SEC filings. In its 1999 annual report the company wrote that= =20 "the use of financial instruments by Enron's businesses may expose Enron t= o=20 market and credit risks resulting from adverse changes in commodity and=20 equity prices, interest rates, and foreign exchange rates."=20 Analyzing Enron can be deeply frustrating. "It's very difficult for us on= =20 Wall Street with as little information as we have," says Fleischer, who is= a=20 big bull. (The same is true for Enron's competitors, but "wholesale=20 operations" are usually a smaller part of their business, and they trade a= t=20 far lower multiples.) "Enron is a big black box," gripes another analyst.= =20 Without having access to each and every one of Enron's contracts and its= =20 minute-by-minute activities, there isn't any way to independently answer= =20 critical questions about the company. For instance, many Wall Streeters=20 believe that the current volatility in gas and power markets is boosting= =20 Enron's profits, but there is no way to know for sure. "The ability to=20 develop a somewhat predictable model of this business for the future is=20 mostly an exercise in futility," wrote Bear Stearns analyst Robert Winters= =20 in a recent report. ? http://www.fortune.com/indexw.jhtml?channel=3Dartcol.jhtml&;doc_id=3D200625 Colleague at Fortune http://www.fortune.com
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