at [email protected] I believe this is the article=3D=3D=3D So why is Enron trading at such a huge multiple? Bethany McLean. Known for, “Is Enron Overpriced?” Spouse(s), Chris Wilford (m. , d) Sean M. Berkowitz(m. ). Children, 2. Bethany McLean (born December 12, ) is an American journalist who is a contributing first wrote about Enron with her article in the March 5, issue of Fortune entitled, “Is Enron Overpriced?”. Article profiles Bethany McLean, Fortune magazine financial writer who highlighted on its cover with the headline, ”Is Enron Overpriced?”.

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Wall Street is a far less glitzy place, but there’s still such a thing as an “It Stock. By almost every measure, the company turned in a virtuoso performance: 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 arrticle opinion of itself. But for all the attention that’s lavished on Enron, the company remains largely impenetrable to outsiders, as even some of its admirers are quick to admit.

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. To skeptics, the lack of clarity raises a red flag about Enron’s pricey stock.

Even owners of the stock aren’t uniformly sanguine. And the inability to get behind the numbers combined with ever higher expectations for the company may increase the chance of a nasty surprise. Morgan’s private bank, who despite his remark is an Enron fan. What’s clear is that Enron isn’t the company it was a decade ago. But Enron has been steadily selling off its old-economy iron and steel assets and expanding into new areas.

But describing what Enron does isn’t easy, because what it does is mind-numbingly complex. 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 enrkn, to create contracts for third parties and to hedge its exposure to credit risks and other variables. If you thought Enron overpiced just an energy company, have a look at its SEC filings. In its annual report the company wrote that “the use of financial instruments by Enron’s businesses may expose Enron to market and credit risks resulting from adverse changes in commodity and equity prices, interest rates, and foreign exchange rates.

Analyzing Enron can be deeply frustrating. The same is true for Enron’s competitors, but “wholesale operations” are usually a smaller part of their business, and they trade at far lower multiples. Without having access to each and every one of Enron’s contracts and its minute-by-minute activities, there isn’t any way to independently answer critical questions about the company. For instance, many Wall Streeters believe that the current volatility in gas and power markets is boosting Enron’s profits, but there is no way to know for sure.


To some observers, Enron resembles a Wall Street firm.

Is Enron Overpriced?

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. Nor at the moment is Enron’s profitability close to that of brokerages which, in fairness, do tend to be more leveraged.

That’s about the same rate of return you get on far less risky U. Enron vehemently disagrees with any characterization of its business as black box-like.

It also dismisses any comparison to a securities firm. In Enron’s view, its core business–where the company says it makes most of its money–is delivering a physical commodity, something a Goldman Sachs doesn’t do.

And unlike a trading firm, which artticle 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. Both Skilling, who describes Enron’s wholesale business as “very simple to model,” and Fastow note that the growth in Enron’s profitability tracks the growth in its volumes almost perfectly.

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.

As for the details about how it makes money, Enron says that’s proprietary information, enon of like Coca-Cola’s secret formula. Fastow, who points out that Enron has 1, trading “books” for different commodities, says, “We don’t want anyone to know what’s on those books. We don’t want to tell anyone where we’re making money. In addition to its commodities business, Enron has another division called Assets and Investments that is every bit as mysterious.

This business involves building power plants around the world, operating them, selling off pieces of them, “invest[ing] in debt and equity securities of energy and communications-related business,” as Enron’s filings note, and other things. Actually, analysts don’t seem to have a clue what’s in Assets and Investments or, more to the point, what sort of earnings it will generate. In written reports, Morgan Stanley chalked up the decline to the poor performance of Enron’s “significant number of investments” in telecom stocks; Dain Rauscher Wessels blamed it on a lack of asset sales.

In any event, some analysts seem to like the fact that Enron has some discretion overpricrd 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 ovwrpriced of a business by its cash flow from operations. But Enron says that extrapolating from its financial statements is misleading. The fact that Enron’s cash flow this year was meager, at least when compared with earnings, was partly a result of its wholesale business.


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.

Overpricced in the valuation are reported in earnings. But these earnings aren’t necessarily cash at the instant they are recorded. 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. That’s why, he says, Enron’s cash flow will be up dramatically, while debt will be “way down, way down” when articke company publishes its full year-end results, which are due out soon.

That’s good, because Enron will need plenty of cash to fund its new, high-cost initiatives: 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.

FORTUNE archive: Is Enron Overpriced? – Jan. 19,

Not all analysts are so aggressive. Of course everything could go swimmingly. The bullish scenario for Enron is that the proceeds from those sales will reduce debt, and as earnings from new businesses kick in, the company’s return on invested capital will shoot upward.

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. The problem, as we know from innumerable failed dot-coms, is that the y enormous market doesn’t always materialize on schedule.

And Enron isn’t leaving itself a lot of room for the normal wobbles and glitches that happen in any developing business.

Enron doc debuts just in time for trial of Lay, Skilling

In the end, it boils down to a question of faith. It’s in a bunch of complex businesses. Its financial statements are nearly impenetrable. So why is Enron trading at such a huge multiple?