Enron's Own Dot-Com Bubble Finally Popped
Enron (ENE) is no longer an Internet company.
Now that dot-com valuations have gone the way of full-service gas stations, Enron is finally owning up to reality regarding the broadband business. "It's like someone turned off the light switch," Enron President and CEO Jeffrey Skilling told investors Thursday morning while announcing an otherwise solid quarter. "Revenue opportunities have just dried up."
Indeed, Enron recorded a $109 million loss related to its broadband businesses, compared with income before interest, minority interest and taxes of $17 million in the year-earlier period. Skilling noted that Enron would dramatically scale back the burn rate for its broadband business and that the expectations for resuming progress in this market have been pushed back by at least a year.The story was so different a year and a half ago. With Enron's shares trading in the low 50s, Enron convinced analysts -- who openly admitted their ignorance of the telecommunications issues important to the broadband market -- that bandwidth delivery opportunities were huge. Enron cajoled the stock price into the $90s by August, after telling analysts that the broadband business alone was worth $37 per share, or $27 billion. Today, despite sound performance in its key, wholesale energy-distribution business, Enron's shares are worth $49.55. Even Wall Street, convinced perhaps that the prospects for an IPO of the once-hot Internet operations are totally dead, has gone back to analyzing energy prospects. Ronald Barone, a "natural gas/energy convergence" analyst with UBS Warburg in New York, lowered his price target Thursday on Enron from $102 to $70. In a report, he noted that his earlier projected price applied a multiple of 40 to his previous 2002 earnings target of $2.10 per share and $17 worth of value for broadband services. Now Barone assumes 32 to 33 times estimated 2002 per-share earnings of $2.15 (the same EPS estimate CEO Skilling offered on Thursday's conference call) and zero value for broadband. Enron must be one of the most promotional companies on the planet. If investors played the old Bob Newhart drinking game and had to refill their mugs every time Skilling said "outstanding" in relation to second-quarter performance, they would have been drunk before the question-and-answer session. But Skilling doesn't like the new reality. "Everything has been taken out of our stock for the bandwidth business," he correctly observed. "We are probably getting a negative impact on the stock, and I don't think that's right." Interestingly, as recently as January, management at Enron suggested to Wall Street that its discounted cash-flow models suggested a value of $126 for the stock, including $40 a share for the broadband business. Why companies feel it's proper even to comment on their own stock prices is a wonder. Skilling had nothing to say about the $126 valuation, and analysts didn't query him about it. Oh, it's right all right. No longer the bright shining prospect, broadband is a real drag on the company now, albeit a small one. Robert Franson, an analyst with Bear Stearns in New York, notes that the old IPO rumor has been replaced by one suggesting Enron will sell or lease its broadband network while maintaining the services businesses built around it. "One great thing about Enron is that it is constantly getting out of businesses that aren't right," he says. Bear Stearns had the luxury of initiating coverage on Enron only in December, so it was able to sidestep the trap of perceived value to the broadband business. Donato Eassey of Merrill Lynch is hanging on to hope. "We believe Enron at current prices offers investors a free call option on the future of broadband, and the ultimate turnaround in the telecom market once it occurs," he told clients in a report. Eassey has a price target of $74.50 on Enron's shares. For what it's worth, in April 2000 Enron traded for about 43 times Wall Street's 2001 earnings estimates of about $1.65 per share. Now the company predicts 2001 EPS of $1.80 (showing the success of its main wholesale business), and is valued at about 23 times its own 2002 earnings estimates. It's worth noting that Enron is a good example of a company that has taken advantage of the Internet. Skilling said 60% of the company's transactions occurred on the Internet in the second quarter. That's impressive, but no more so than all the business Dell or Cisco does online. Efficient use of Internet infrastructure does not an Internet company make. Interestly, Enron is in much better shape than the upstart companies to which it eagerly compared itself 18 months ago in justifying a higher valuation. By giving up all of the hype-driven market value it received from gullible investors with dot-com stardust in their eyes, Enron merely is back to about where it belongs, or, as Skilling argues, perhaps a little lower. Comparable stand-alone "bandwidth" companies like Akamai (AKAM) and Exodus (EXDS) have given up most of their boom-time value. Enron prudently says it will maintain a stake in the ground of broadband services so it can benefit when the market materializes. Perhaps when that happens, Wall Street will value the incremental business for what it's worth, not what they dream it's worth.
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