Friday 21 March 2014

Analysis of Enel 2014

An Italian energy and gas company

Company: Enel

Business: An Italian energy and gas company. They have hydroelectric, thermoelectric, nuclear, geothermal, wind, solar and other renewable power plants. They also have the network not only for electricity but also for gas pipelines.

Active: Strongest presence is in Italy and in Iberia (= Spain and Portugal). Some presence in France, Slovakia, Romania, Greece and Russia. In Latin American they have a strong presence with renewable energy. In North Africa they are active with exploration of gas fields. In total they are present in 40 countries on four continents.

P/E: 11.8

The previous analysis of Enel can be found here.

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

The P/E of Enel is this year more "normal" due to increased earnings and it is at 11.8 which is good and the P/B is ok with 1.1 which gives a very clear buy according to Graham. Their earnings to sales have also improved significantly and are now at 4% which is ok but with the ROE it would have been nice to see a higher value since it is only 9%. The book to debt is low with a ratio of 0.3 but it is fairly normal for the large energy companies (see for instance E.On.). In the last six years they have had a yearly growth of 4.7% which is very nice and it gives us a motivated P/E of 15 to 18 which means that Enel is today undervalued by the market. They pay a dividend of 3.2% which is ok but one could have hoped for higher especially with that low ROE but still that only represents 38% of their earnings so with remained earnings they should at least be able to keep and even increase the dividends in the future.

Conclusion: Graham says yes to this company and I am less certain. Sure the P/E and P/B looks great but the ROE is not at a level that I prefer and also the dividend is too low for my liking. They are also active in regions with trouble such as North Africa, South America and in Russia which of course all the oil giants also are all the time but I assume over the years that they have experience with such matters and an energy company from Italy I just do not know. So... I do not think that I would step in as a new shareholder in Enel but I personally could today consider to dilute up my share price by buying more shares. I do not think that I will though.

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Anonymous said...

Hi! I have noticed that you like companies with high roe, low p/e and low p/b. Good so. Anyway I also noticed that some of the companies you own full fill at least some of those criterias but are still not doing well. Why? And is it not because you get trapped in "value traps"? Good p/b, good p/e and slowly going down.

Fredrik von Oberhausen said...

Hi there,

Yes, that is indeed true that I have started to look more and more also on ROE which in the beginning was not at all part of my evaluations.

I have one really rotten egg and that is Asian Bamboo but besides from that almost all my companies are doing well and are generating nice revenues each year. But this is either not yet acknowledged by the market or it simply does not live up to the markets expectations for that specific company. But in my equations I never consider what the market will do next because there is no way to know.

Value traps is a very interesting topic. I think I will try to write a specific article about it one day. The more I think about it the more I get uncertain about the existence of value traps. On one blog I brought it up a little as discussion which companies in the past were value traps and the reply I got back were in my opinion 14 companies that they suspected were value traps today and one from that past that I would actually accept as being a value trap namely Kodak but they on the other hand completely messed up with the digital cameras. They even made the first versions on their own but then dropped the ball to keep their cash cow running of selling film. So were they a real value trap in the sense that the P/E was low? I would have suspected that the P/E would go sky high due to low earnings when the digital camera bombs fell.

I think given time and a desired product or service that is being sold by the company then I doubt they will ever become a value trap. Meaning I am not scared of telecom and I am not scared of energy and oil companies that people today consider to be kind of value traps. They will rise sooner or later but before they do they might drop further and I will try to buy even more shares.

Sorry for my long reply but to summarize I expect my companies to do well three to five years from now and besides from Asian Bamboo I consider all of them to be healthy companies with a bright future.

Anonymous said...

I think one reason some of the stocks that get the ok nod from Graham might underperform in todays completely overvalued exchanges is because they suck.

Looks to me tide is turning and I have noticed an increased number of quality stocks getting closer to Graham criterion.

Great blog, sorry about my english

Fredrik von Oberhausen said...

Hmmm... I think that it is very important to define what makes the co pany bad. If it really is earnings then yes, they do indeed suck but if it is based on markets future expectations then in my opinion market suck becuase in my eyes they work on quarter reports and that is far too short for my way of thinking.

Thanks! Your english is excellent!