Analysis of RWE 2020

Company: RWE 

ISIN DE0007037129 | WKN 703712 

Business: A German electricity and gas company. RWE currently have four pillars to stand on: Renewable (planning to invest ~1.5 bn € per year), Generation (gas, coal, hydro which I would have expected to be in renewables), Power (lignite ~ coal, nuclear) and finally Supply & Trading (of all products)

Active: Europe mainly.

P/E: 1.9

Here you can find the previous Analysis of RWE 2018. 

The P/E is looking good with 1.9 as does the P/B with 1.0 which means that Graham gives the green light on this one. The earnings to sales are too impressive with 64% as is the ROE with 50% but I would claim that comes from the high debt leveraging and significant earnings from discontinued activities. The book to debt ratio is looking a bit better but still bad with 0.36.

In the last two years (only look back to E.On. deal) they have seen a yearly decrease in revenue growth in the size of -0.9% which bad and this then gives us a motivated P/E of around 6 which means they are undervalued by the market today.

They invest a miniscule amount of money into R&D in the size of 0.3% which I find to be very low so pretty much everything is outsourced and they will buy off the shelf products.

They paid out a dividend of 3% which is ok and this only corresponded to less than 6% of their earnings so that is good however, 9816 million € in earnings came from discontinued businesses. Without that they would have made a loss.

Future: Nuclear, coal, gas, oil and a bit of renewables. Just like E.On they will be struggling with the oil giants on the renewable market and therefore I am uncertain about their future. Personally I am not against nuclear but many people are which must be respected and there has been strong protests in Germany against nuclear power and the transport of nuclear waste. I did not intend to be in RWE for the long run and if I would have been more observant then I would probably have stepped away from RWE when the share price was above 30 back in 2019.

Conclusion: Graham gives a go based on the simplistic PE/PB valuation but I am uncertain of RWEs future and excluding the discontinued then 2019 was not a great year. I will remain an observant shareholder - ready to sell.