re: Barrons article 3.26.00
Hello, New Economy
By Harlan S. Byrne
When the Houston Astros
officially open their new ballpark on April 7, the first pitch will be
tossed out by Kenneth L. Lay, Enron's chief executive. It's one
of the perks you get after you lead the drive to build a retractable-domed
stadium in downtown Houston and get your company to chip in $100 million to
make sure the park is named Enron Field. Those kinds of exertions ensure
that your company will get loads of free nationwide advertising every time
ESPN or another network televises a game there. And they also help you win
a 30-year contract, worth $200 million, to manage the facilities at the
ballpark.
Such bold moves aren't surprising to anyone familiar with the passion
that Lay has displayed for being a "first mover" in his 14 years at Enron's
helm.
Early on, the now 57-year-old executive pushed Enron far ahead of the
competition in trading natural gas and electricity, as the wholesale
markets were deregulated in North America and, increasingly, elsewhere in
the world.
And two months ago, Enron stunned portfolio managers and analysts by
unveiling a new growth engine: Enron Broadband Services. This unit will
trade high-speed communications bandwidth, the guts of the Internet, over
the company's extensive fiberoptic network.
All of a sudden, telecommunications analysts joined energy analysts in
following the company. A number of competitors rushed to announce their
intention of emulating Enron (although they certainly didn't put it that
way). Bandwidth and fiberoptic cable had became, as Lay smilingly describes
it, Wall Street's "flavor of the day."
CEO Kenneth Lay: big innovator who's big on broadband
Today, several floors at the corporation's 50-story headquarters,
located about a mile from Enron Field, are occupied by hundreds of traders
posted at computer screens, reminiscent of the rows of trading desks at big
Wall Street securities firms. The traders facilitate the fast, efficient
transfer of unused capacity, as demand dictates. Extra power, for instance,
is dispatched to areas suffering from a severe hot spell.
Profits come from the spread between what Enron pays for power and what
it fetches when resold. While a big majority of Enron's trading encompasses
gas and electricity, the company has been trading an increasing number of
other things, including pulp and paper, plastics and even pollution
credits.
Lay and his crew, including many people recruited from outside, are
constantly trying to come up with new items to trade. Enron boasts that it
often introduces a trading product before its rivals even sense that a
market exists. Innovations can have a big impact because trading now
accounts for the bulk of Enron's earnings.
The stock has shown nice growth in recent years, following a few rough
spots. But it really took off last year, spurting ahead by more than 55%,
to 44 3/8. And the announcement of Enron Broadband Services boosted it
further. Recently the shares, which trade on the Big Board, have jumped
close to 75.
Nearly as exciting, though less sexy, has been Enron's move into energy
services, mainly gas-and-electricity management. Now highly profitable
after several struggling years, this business serves many kinds of
clients.
Also boosting Enron's prospects: Enron Online, launched in November to
increase the efficiency of trading markets and to cut processing costs.
Abroad, Enron has power-plant projects in Europe, Latin America and Asia
-- particularly in countries that are deregulating and privatizing their
markets.
Add all the newer ventures to the company's core wholesale North
American energy operations, still growing at 35% a year, and Enron's
outlook glistens. "From just what we're doing now, we see five to eight
years of substantial growth in earnings," Lay says.
Only in the past year or so, however, have many investors caught on to
the changes that are reshaping the company. Pointedly, its
soon-to-be-released 1999 annual report starts with this line: "Enron is
moving so fast, sometimes others have trouble defining us." In an attempt
to bring investors up to speed, Enron early this year launched a national
TV advertising campaign.
For now at least, many portfolio managers and analysts seem to be
looking kindly on the stock. Janus Capital Corp., an investing arm of the
Janus Fund Group, has loaded up on Enron shares. Indeed, it's now reported
to be the company's largest stockholder, with about 60 million shares,
worth over $4 billion, at recent prices.
Says Erik Ruben, who follows the company for Janus: "Opportunities for
Enron in both energy and telecommunications markets are endless. They've
demonstrated by their marketing skills that they can uniquely put all the
pieces together to provide solutions for clients and without necessarily
having to rely on physical assets. No one has been close to matching
Enron's success."
A growing tribe of 21 analysts (triple the number only three years ago)
recently reported to First Call, checking in with 10 "strong buy"
recommendations and six "buys." Their consensus forecast for this year's
first quarter calls for earnings of 37 cents a share, versus 34 cents a
year earlier. For all of 2000, the consensus prediction is $1.38; for 2001,
$1.62. Last year, net came to $957 million, or $1.18 a share. And that, in
turn, was 37% above the $700 million, or $1.01, reported in 1998. Wholesale
energy sales and services contributed more than 60% of operating income
last year. As for revenues, they rose 28%, to $40 billion.
Recently, some analysts have boosted their price targets on Enron to
nearly 100. But Jeffrey K. Skilling, the company's 46-year-old president,
argues that the shares really are worth around 120. His reasoning: Most
analysts have yet to give much value to, among other things, the burgeoning
communications bandwidth business, which began trading last December and
already is racking up impressive numbers -- more than 1,000 trades a
day.
Building hot new businesses hasn't been easy.
For example, Enron spent several hundred million dollars and several
years developing its retail-energy-services unit before seeing it move into
the black in 1999's final quarter, when it showed a $7 million operating
profit, against a $26 million loss a year earlier.
The unit's potential, however, is huge. The value of newly signed
contracts has been climbing steadily, reaching $8.5 billion last year. New
customers include outfits as diverse as Polaroid, the Simon Property Group
(a large real-estate developer) and the U.S. Defense Department. This year,
new contract volume should total $16 billion, producing an operating profit
of at least $75 million. That would compare with losses of $68 million for
all last year and $119 million in 1998, when new contracts amounted to $3.8
billion.
Enron is prepared to go through much the same struggle to make its
broadband unit profitable. The division can trace its parentage to Portland
General Electric, a large West Coast power producer acquired in 1997 to
provide a backup source of electricity for power-trading activities.
Portland General had a small group, 20 people in all, working on laying
fiberoptic cable in its local area. This eventually led to an undertaking
that now employs several hundred people and that has overseen the laying of
an 18,000-mile fiberoptic network across the country to provide high-speed
bandwidth for many users.
"Ken Lay decided a year ago, this could be a significant opportunity,"
recalls Joseph M. Hirko, Enron Broadband's 43-year-old CEO. The project was
reaching fruition at about the same time Enron was set to launch its online
service. "We saw bandwidth trading as able to leverage off Enron's
marketing skills," Hirko adds.
Enron devised what its engineers view as the most diverse system for
delivering broadband services. The big fiberoptic network is laced with
servers and giant electronic switching systems known as pooling points,
permitting connection with the many carriers and users tied to the
Internet. Five years from now, Lay has predicted, broadband services will
generate as much in earnings and revenues as the entire company did last
year.
Gearing up for the future, of course, is costly. Enron is spending $650
million on the venture, which probably will post an operating loss this
year. Starting next year, however, the picture should brighten sharply.
To finance the fiberoptic network, Enron is selling Portland General,
which it no longer considers necessary as a backup source of electricity
for trading, to Sierra Pacific Resources for $2.1 billion. To make up for the loss of the
utility, Enron plans to build "peaking plants" (which usually are much
smaller than main power plants) to provide power as needed. The peaking
plants can be controlled from Enron's power trading rooms by the mere flick
of a switch. The Houston Astros must wish that they could control their
power output so easily. |
