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Date: Fri, 6 Apr 2001 02:02:00 -0700 (PDT)
From: george.kneisley@enron.com
To: larry.campbell@enron.com
Subject: Is Enron Overpriced?
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A colleague has sent you this article from Fortune (http://www.fortune.com)=
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Reply to your colleague at george.kneisley@enron.com
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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

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