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IssueAlert for  March 23, 2001 

Enron Stock Drops Amid Concerns About Broadband Business, 
General Market Trends

by Will McNamara 
Director, Electric Industry Analysis

[News item from Reuters] Shares of electricity and natural-gas marketing 
giant Enron Corp. (NYSE: ENE) slid further on Thursday (March 22) amid 
broader weakness in energy stocks, despite a reassurance from the company 
that it would hit its previously stated target earnings for this year. Enron 
was off $3.34, or 6 percent, at $52.55 on March 22, after falling 8 percent 
on March 21. So far this year, Enron's stock is down about 37 percent, versus 
a 16-percent decline for Standard & Poor's utilities index and a 20-percent 
drop for the Dow Jones industrial average. 

Analysis: Over the last several weeks, a growing number of smaller, emerging 
energy companies have felt the impact from the nation's struggling economy 
and the likelihood of an impending recession. Just recently, start-up 
companies such as Silicon Energy and Hydrogen Burner Technology have 
withdrawn their IPO plans, citing an anemic stock market and the lack of 
positive cash flow. A look across the stock market can send shivers down the 
spines of most energy company CEOs, as the Dow Jones industrial average 
tumbled below the 9,200 point for the first time in two years, and the Nasdaq 
composite remains 64 percent off of its March 10, 2000, high of 5,048, 
putting the economy in bear market territory.  

However, while the stocks and public offerings of smaller energy companies 
may crash and burn, the giant energy company that is Enron Corp. typically 
has seemed immune from the high and low tides of the U.S. economy. Over the 
course of 2000, Enron shares returned 89 percent and traded at roughly 55 
times trailing earnings, reportedly more than 2.5 times the multiple of its 
some of its main competitors or the S?500. Nevertheless, Enron's winning 
streak in the stock market may be eroding, as the waves that are crashing 
around many other energy companies may also be dragging Enron into the same 
whirlpool. 

For perspective, Enron's closest competitors across its various business 
lines, Williams and Dynegy, also appear to be taking the hit from the bear 
market. Williams (NYSE: WMB) saw its stock decline $3.34, or 8 percent, to 
$38.10 on March 22. Dynegy (NYSE: DYN) saw its stock drop $2.26, or 5 
percent, to $44.50. Of course, of the three companies, Enron wields the 
highest P/E ratio at 49.99 and largest market capitalization at $41.7 
billion. By comparison, Williams has a P/E ratio of 21.53 and market 
capitalization of $20 billion, while Dynegy has a P/E ratio of 31.98 and 
market capitalization of $15.2 billion. 

Analysts that keep a close eye on Enron's stock say the sudden decline is not 
a reflection of any new business developments at the company, but rather a 
market that is struggling in general, and a growing disenchantment among 
investors in technology and telecommunications in particular. This may be 
having a unique impact on Enron as the company attributed much of its strong 
stock performance over the last year to its growing expansion into the 
telecommunications / broadband market. Just as the company has achieved 
unparalleled success in electricity and natural-gas trading, for the last 
year Enron has been developing a high-speed broadband communications network 
to support its planned move into bandwidth trading and marketing. Enron 
projects a $450 billion worldwide market for communications bandwidth trading 
and services by 2005, and the valuation of its own broadband business at $40 
a share, or $35 billion. The company plans to trade excess bandwidth 
capacity, and in order to do so is constructing its own network, which costs 
a lot of money. Enron has acknowledged that it intends to sell between $2 
billion and $4 billion in assets over the next 12 months in order to reduce 
debt and support the new business in broadband (among other businesses in 
pulp and paper, data storage and advertising). 

Thus, much is riding on the anticipated success of the broadband business, 
and Enron's role in it. Up to this point, confidence in both the industry and 
the company have run high. Some analysts have reported that interest in 
Enron's expansion into this area, validated by investor interest in new 
technologies in general, drove an 87-percent rise in the company's share 
price last year. Yet, once again, the tide may be turning. Investors no 
longer seem to be as enthralled by emerging technologies that have not 
resulted in bottom-line profits, much as the year before e-commerce stocks 
also found that their "day in the sun" ended rather abruptly.  

And, although nearly every other Enron line of business has turned to gold, 
its broadband business has remained immature. In fact, for year-end 2000, 
Enron Broadband Services reported a $60 million IBIT loss, reflecting startup 
costs to build the new business. The company seems to have anticipated the 
slow growth of its broadband business. In fact, Enron CEO Jeffrey Skilling 
did not appear concerned over the loss and said that it took between five and 
six years for the company's natural-gas business to develop standardized 
contracts and increase liquidity. Skilling has said that these numbers do not 
dilute his belief that bandwidth trading will soon become a strong performer 
for the company. While Skilling remains optimistic about the potential of the 
broadband business, investors may not be as patient. (Note that while Enron's 
broadband business took a loss for 2000, the company as a whole reported a 
25-percent increase in earnings per diluted share to $1.47 and a 32-percent 
increase in net income to $1.3 billion). 

In late January Enron had increased its earnings target for 2001 to between 
$1.70 and $1.75 per share. In response to the sudden drop in stock price and 
speculation that its broadband business would receive new pressure to become 
profitable, Enron issued a brief statement reiterating that it "remains very 
comfortable" with the 2001 earnings estimate. An Enron spokesperson also made 
references to "information in the market that is inaccurate," suggesting that 
any speculation about problems in its broadband business were unfounded, 
including potential layoffs at the broadband unit. According to a report on 
CBS.MarketWatch.com, investors polled by First Call / Thompson Financial are 
still expecting Enron to turn in earnings in a range of $1.67 to $1.80 for 
2001. 

Nevertheless, despite Enron's reassurances that it remains on track to meet 
its earnings estimate, the company's stock continued to drop. As noted, 
investors began to put downward pressure on the stock, pushing it to $52.50 
(as of March 22), below its 52-week low of $55 and far below its 52-week high 
of $90.56.  

Some of the decline may be attributed to the fact that many investors remain 
unclear about what it is that Enron does, exactly. According to a March 5 
article in Fortune magazine entitled "Is Enron Overpriced?", some Wall 
Streeters are skeptical about how the company makes its money, and the lack 
of clarity has often raised a red flag about Enron's pricey stock. The 
skepticism did not seem to steal any of Enron's thunder in a bull market, but 
that could all change quickly in a bear market. Enron may in fact exacerbate 
Wall Street's distrust in its business model by not fully disclosing its 
financial records for what it deems "competitive reasons." The Fortune 
report, which was published before Enron's stock began to decline, also 
indicated that investors are concerned about Enron's debt. Although the 
company continues to promise a reduction in its debt load, Enron carried a 
net $13 billion debt at the end of September 2000. Again, although investors 
may have been able to look the other way from Enron's debt during a strong 
economy, it appears that investors will use a fine-tooth comb to examine the 
company's financial records during the increasingly unstable economy. 

Moreover, in addition to a possible impatience with the growth of technology 
and telecommunications stocks, investors may also be concerned that a global 
economic slowdown could reduce demand for energy as a whole, resulting in 
lower commodity prices. Drops in the stocks of Dynegy and Williams possibly 
validate this theory.  

Enron was quick to quell rumors that its stock began to fall as a result of 
problems with its broadband unit. Looking at the big picture, it appears 
reasonable that the broadband business on its own has not caused the drop in 
Enron's stock. Rather, Enron shares have mostly likely fallen as a result of 
several factors. Yes, investors appear to now be less likely to support new 
technologies and telecommunications businesses that have not proven to be 
presently profitable. In addition, Enron is in many ways an enigma. In an 
unstable economy, the uncertainty surrounding Enron's business could prompt 
an unprecedented hesitation about the company's business model. And, lastly, 
Enron is not alone among energy stocks (and stocks in general) that are 
weathering the fallout of the stock market. On the bright side, Enron still 
remains a very puissant company, despite the sudden drop in its stock price. 
Enron's P/E ratio of 49.99 is still quite strong when compared against other 
energy companies. In addition, Enron is a company full of surprises, and it 
is doubtful that any temporary drop in its stock price will keep the company 
down for long. 

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