Enron Investors Are Yearning for Earnings

Will Enron (ENE Quote - Cramer on ENE - Stock Picks) provide a powerful lift to its sagging stock when it announces earnings on Tuesday?

Dour Darling Enron has stumbled this year

Investors sure are hoping so. The Wall Street energy darling has stumbled this year, losing more than 30% of its value since January as investors flock from high-multiple stocks in general and from some Enron-specific problems in particular.

Enron's run of bad luck includes these recent events:

• Last week Enron revealed it is owed $570 million by now-bankrupt Pacific Gas & Electric (PCG Quote - Cramer on PCG - Stock Picks), an amount much higher than many analysts expected.

• Sierra Pacific Resources (SRP Quote - Cramer on SRP - Stock Picks) said it will suspend its quarterly dividend -- as the effects of the California energy crisis spill over to other Western states. That put the final nail in the coffin of Enron's plans to sell its Portland General unit to the Nevada-based utility.

• Enron's investment in India has again come under attack. The Dabhol Power Company, 65% of which is owned by Enron, is owed nearly $50 million by the Maharashtra state government, which is asking Enron to renegotiate the contract for the third time in seven years.

• In December, Enron was forced to repurchase Azurix, an international water utility after the spinoff suffered from management gaffes and financial challenges.

• And, after initially denying that layoffs were imminent within the company's upstart broadband unit, Enron acknowledged it would cut 250 jobs, or 20% of its broadband work force. The company also terminated a joint venture with Blockbuster to provide video-on-demand services.

Add moderate insider stock sales, and news like this would put pressure on most stocks. But this is Enron. And while the stock has sagged, many unabashed bulls on the Houston energy giant are still touting $100-plus price targets on the stock.

Part of that is the charm and cheerleading of Enron's executive duo, Chairman Ken Lay and President and CEO Jeffrey Skilling. In late March, when the stock slumped to near $50 (on news, first reported by my colleague Peter Eavis, about problems at Enron's broadband unit), Skilling held an impromptu conference call to assure investors Enron would still meet this year's earnings guidance of $1.70-$1.75 per share. The stock almost immediately rebounded, albeit temporarily, trading above $60 before worries over California and the reality of layoffs at the company's broadband unit pushed it back to the mid-$50s.

What was unusual about the call was its timing. Skilling really had no news to report. Instead, the call appeared intended to be the kind of cheerleading rally for the stock that most companies try to avoid. "The reality is, there was nothing materially new on this call other than formal comments addressing market concerns," noted UBS Warburg analyst Ron Barone, who rates Enron a strong buy and has a $102 price target on the stock. However, he notes his "12-month pricing objective (and the similar targets of several of our peers) now looks like 18- to 24-month price objectives." His firm has provided banking services for Enron in the past three years.

Enron On Sale?

While Enron as a value play was a difficult argument when the stock was pushing $90, many investors feel today's price presents an opportunity for investors who missed the last run. "Though painful, this collapse combined with the recent downward revision of some highly aggressive price targets well above $100, could prove to be healthy steps in getting this once-top performer back on track to delivering superior shareholder returns," noted Barone.

Many investors agree, arguing that the current price discounts all the bad news the company might face. For example, while the company will not discuss specific amounts, Skilling and Lay have indicated several times that regardless of what happens in California it will have no material impact on the company's earnings. And, while the company's strategy of selling its capital-intensive businesses like Portland General and Azurix has stumbled, Lay has said the company can still make a "nice profit" from those businesses.

That gives one investor comfort that Enron is poised to rebound. "I simply do not believe there are any issues with Portland General or PG&E which the market is not aware of," says Tom McIntyre, president of Dessauer and McIntyre, a Massachusetts-based investment adviser. "There is no reason to think that Enron would be blindsided by events or would keep them from investors."

McIntyre, who has a long position in Enron, says the current stock price is an opportunity. "The stock has fallen because of these concerns and concern over India and broadband," he says. "The company's core businesses are performing very well. The events which the market is focusing upon today will not be remembered for very long."

Still Some Skeptics

While Enron's 30% dip this year means a bargain for some, it just means a little less froth for others.

John Olson, director of research at Sanders Morris Harris, a Houston investment firm, says Enron -- while more reasonably priced than it was in January -- remains expensive. "Enron has obeyed the laws of high price-to-earnings gravity," Olson says. "But it's still expensive from a value perspective. It is probably worth about 25 times earnings. I think for people to make some serious money, you have to wait for the stock to come down a little more. That would suggest a $45-$50 kind of buying range." In an interview earlier this year, Olson suggested Enron was overpriced and ready for a fall.

And as for those $100-plus price targets, Olson says they are "implausible in the context of what has happened to other three-digit price targets" recently, but acknowledges he has a different perspective. "Most of my peer group is with investment banking firms. I think one has a different perspective when you don't have 900 investment bankers breathing down your neck."

Technically, he may be correct, at least according to our own technician, Gary B. Smith. And, as they say, a picture paints a thousand words, and here's one that's not so pretty.

Going Down? Some experts say a $100-plus target price is implausible for Enron

Ahead of Earnings

Enron traded higher on Monday ahead of earnings, in spite of the revelation regarding its exposure to Pacific Gas & Electric. Enron closed at $59.44, up $2.14.

Estimates call for Enron to post earnings of 45 cents per share for the first quarter, but at least one analyst expects Enron to beat the estimates. "They will likely report 46 cents to 50 cents for the quarter," says Jeff Dietert, power analyst at Simmons & Co., a Houston energy investment firm. "Everybody assumes they will come in around 45 cents, and I expect them to beat that by a penny or two. It's been a good quarter."

He did note that he was somewhat surprised by the size of the company's exposure in California. "The size of the exposure isn't consistent with what they were telling the Street," he says. "However, they were making a market in California credit, and you can't do that without selling to the utilities."

That said, Dietert would buy ahead of the earnings news, noting that Enron typically trends higher around its announcements. "They tend to beat the estimates and that usually gets a positive reaction," he notes. "It should be a positive earnings call, as the fundamentals in their business are positive."

It's a busy week for power earnings. In addition to Enron, Dynegy (DYN Quote - Cramer on DYN - Stock Picks) and Duke Energy (DUK Quote - Cramer on DUK - Stock Picks) -- also companies involved in the California conundrum -- are expected to report on Tuesday. Both are also expected to exceed expectations on the strength of wholesale power markets, especially in the Western U.S.