IS ENRON OVERPRICED PDF

Its financial statements are nearly impenetrable. So why is Enron trading at such a huge multiple? Not surprisingly, the critics are gushing. Along with "It" status come high multiples and high expectations. Enron now trades at roughly 55 times trailing earnings.

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Its financial statements are nearly impenetrable. So why is Enron trading at such a huge multiple? Not surprisingly, the critics are gushing. Along with "It" status come high multiples and high expectations. Enron now trades at roughly 55 times trailing earnings. Enron has an even higher opinion of itself. Start with a pretty straightforward question: How exactly does Enron make its money? Details are hard to come by because Enron keeps many of the specifics confidential for what it terms "competitive reasons.

Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. And the inability to get behind the numbers combined with ever higher expectations for the company may increase the chance of a nasty surprise.

But Enron has been steadily selling off its old-economy iron and steel assets and expanding into new areas. CEO Jeff Skilling calls Enron a "logistics company" that ties together supply and demand for a given commodity and figures out the most cost-effective way to transport that commodity to its destination.

Enron also uses derivatives, like swaps, options, and forwards, to create contracts for third parties and to hedge its exposure to credit risks and other variables. If you thought Enron was just an energy company, have a look at its SEC filings.

To some observers, Enron resembles a Wall Street firm. Indeed, people commonly refer to the company as "the Goldman Sachs of energy trading. And as Long Term Capital taught us, the best-laid hedges, even those designed by geniuses, can go disastrously wrong. Enron vehemently disagrees with any characterization of its business as black box-like. It also dismisses any comparison to a securities firm. And unlike a trading firm, which thrives when prices are going wild, Enron says that volatility has no effect on its profits--other than to increase customers, who flock to the company in turbulent times.

Indeed, Enron dismisses criticism as ignorance or as sour grapes on the part of analysts who failed to win its investment-banking business. The company also blames short-sellers for talking down Enron. In any event, some analysts seem to like the fact that Enron has some discretion over the results it reports in this area.

Not everyone is so chipper. At the least, these sorts of hard-to-predict earnings are usually assigned a lower multiple.

There are other concerns: Despite the fact that Enron has been talking about reducing its debt, in the first nine months of its debt went up substantially. Nor does Enron make life easy for those who measure the health of a business by its cash flow from operations. But Enron says that extrapolating from its financial statements is misleading. Accounting standards mandate that its assets and liabilities from its wholesale business be "marked to market"--valued at their market price at a given moment in time.

Changes in the valuation are reported in earnings. Skilling says that Enron can convert these contracts to cash anytime it chooses by "securitizing" them, or selling them off to a financial institution. Enron then receives a "servicing fee," but Skilling says that all the risks for example, changes in the value of the assets and liabilities are then transferred to the buyer. In order to facilitate its plan to trade excess bandwidth capacity, Enron is constructing its own network.

This requires big capital expenditures. So broadband had better be a good business. Both Enron and some of the analysts who cover it think it already is. Not all analysts are so aggressive. Of course everything could go swimmingly. Along with broadband, Enron has ambitious plans to create big businesses trading a huge number of other commodities, from pulp and paper to data storage to advertising time and space.

Perhaps most promising is its Enron Energy Services business, which manages all the energy needs of big commercial and industrial companies. But all of these expectations are based on what Wolfe, the J. Brown senior power strategist. In the end, it boils down to a question of faith.

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Bethany McLean

Is Enron Overpriced? Its financial statements are nearly impenetrable. So why is Enron trading at such a huge multiple? Not surprisingly, the critics are gushing. Along with "It" status come high multiples and high expectations. Enron now trades at roughly 55 times trailing earnings. Enron has an even higher opinion of itself.

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Remember When Enron was Overpriced? The price of Enron stock amazingly rose during the dot com boom and bust. At the turn of the century, the stock market rose and fell amidst the dot com boom and bust. Technology firms rose to the forefront, only for an innumerous amount of firms to crash and burn.

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