Tuesday, March 24, 2015

Analysis of E.On. 2015

E.On, a German energy provider

Company: E.On


Business: A German energy provider and electricity producer. They are currently having ten different business areas: Renewable Energy, Conventional Generation, Energy Efficiency, Exploration & Production, Gas Supply, Gas Storage & Transport, Trading, Distribution, Sales and finally Technical Services. The change in business areas are hopefully to smooth the separation of the green energy and the conventional energy that they plan to do.

Active: They are present in several countries in Europe as well as in Russia and in Brazil.

P/E: -9.0 (P/E5: 27.9)

Here you can find the previous analysis of E.On. 2014

contrarian values of P/E, P/B, ROE as well as dividend for E.On

The P/E is awful for E.On due to loss and is therefore -9.0 and the P/E5 is also not making me impressed with 27.9! The P/B is acceptable with 1.2 still we get a very clear no go from Graham. The earnings to sales are negative as well as the ROE. The book to debt ratio is is scary low with 0.2
In the last five years they have however had an acceptable yearly growth rate of 3.6% which gives us a motivated P/E of 12 to 16 which means that E.On based on P/E5 is highly overvalued on the market today.
They pay a fully acceptable dividend of 3.5% which however they need to take from the coffers / borrow to be able to pay out due to the negative result so that is seriously bad and no dividend should have been paid out but this is what you get with incompetent management and with a majority of institutional investors.

Conclusion: Graham as well as I say directly no to E.On. The company is doing very poorly and have an incompetent manager that seems to be allowed to drive the company to the ground. The only hope is that once they do make the split of the renewable energy that hopefully a new competent manager will take over one of the parts. The only key figure that looks acceptable to me is the P/B but based on the write-downs they are doing I still wonder how big the air castle is...

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John said...


How do you compute the motivated P/E?

Anonymous said...

Hi John,

The motivated P/e is calculated with the formula from Graham which is 8.5+2*growth. The growth is based on their revenue increase in the last five years.

It is not perfect and should not be followed strictly but i wanted to get a feeling for when the company had fair valuation and should be sold off since i find it difficult to decide when to sell stocks.

-fredrik von oberhausen

John said...

Aha, so with no growth the P/E should be 8.5 according to Graham. Is there any theory behind that or is it just a sensible judgement?

Let's try it with a company with insane P/E: Tesla Motors. The revenue growth averages about 40% the last three years. So a motivated P/E is 88.5. Last time I checked it was like 260.

Anonymous said...

I no longer remember the theory behind it but i am sure you can find it either in the intelligent investor or in security analyst.

Well... Neither a p/e of 88 nor 260 would make me sleep well at night. Any company that needs 88 years with remained earnings to repay me my investment i would not feel comfortable with. 260 years is one level further away... It would take a lot to make me not sell a company up at those p/e levels.

In my opinion any p/e above 40-50 and one enters the area of speculation. And a company up at p/e 40 needs to be an extreme and consistent growth company for me not to sell... Such as H&M or Inditex.