San Jose Mercury News, Calif., Stocks.comment Column
February 11, 2002 3:06am
Feb. 11--During the past three months, Calpine, the San Jose power generator, has had one of the roughest slides of its corporate life. From a high of $28.26 in early November, its stock fell to $6.80 Wednesday before recovering to finish last week at $8.40.
Calpine (CPN) has itself to blame for some of its woes. The company has shown evidence of ham-handedness in dealing with the press and public. But more than anything, it's been hit by the twin whammy of falling energy prices and the stain of the Enron scandal.
Is this stock worth buying despite its woes? Yes -- but don't bet the kids' education on it. You'll have to put up with some heartburn.
Advertisement: Explore Within This Space
Brett Gallagher, the head of U.S. equities for Julius Baer, a Swiss private bank, can't be accused of a rose-tinted view of the market. He actually thinks the S&P 500 will finish down for the year, in part because accountants are running scared and will insist on cleaner earnings.
But Gallagher is buying Calpine.
"Here's a company that's asset-rich, with a simple business," he told Bloomberg News. "They issue debt, they take the money and build the power plants. Then they sell the power."
I'd argue that Calpine's business model isn't that simple: It engages in a complicated hedging strategy for locking in prices. It's heavily leveraged, meaning it has lots of debt. And controversy still clings to its accounting for acquisitions.
But fundamentally, Calpine differs from Enron in significant ways. It owns its power plants. And the company says it doesn't have the off-the-balance sheet partnerships that toppled the Texas giant.
It's worth examining the recent charges against Calpine -- not so much to rebut them but to put them in context.
First is the matter of an informal SEC investigation into whether the company violated Regulation FD, the fair disclosure law. Jan. 4, Dow Jones News Service reporter Jason Leopold quoted analysts to the effect that Calpine intended to reduce its earning estimates and trim its ambitious plans for building new power plants.
The company has denied violating Reg FD, which decrees that material information should be given to all investors at once. The Dow Jones story, however, accurately predicted what Calpine did just two weeks later. Analysts got enough to piece together what would happen.
Even if Calpine stepped over the line of the disclosure law, however, it's not the end of the world for investors. It's unlikely to have any substantial effect on earnings.
A second charge is more problematic from a public relations viewpoint: Dec. 20, the company received a "comment letter" from the SEC suggesting that different language should be used to explain a "master netting" agreement with Enron. Essentially, this allowed the two companies to cancel out what they owed each other.
Calpine has said the SEC suggestions will have no financial impact. The problem here is Calpine's tone-deafness toward Enron news. The company has been hit not so much because it did business with Enron -- but because it looked like it wasn't as open about it as it should have been.
You can make a persuasive argument that Calpine should have put out a press release right away about the SEC letter, rather than letting it filter out six weeks later, trashing the stock.
But convicting Calpine on its public relations strategy isn't the same as making a decision about the stock. And so to return to its business: Calpine has been hit hard because of the recession -- people use less energy -- and by a mild winter in the East. With the fear of Enronitis, that has depressed its forward-price earnings ratio to just above 5.
Will recession and mild weather last forever? My guess is no, and that sooner or later, this will work to Calpine's advantage.
"We can look back at history and see a recession and the impact it has on power," says investor relations chief Rick Barraza. "Very quickly, the demand rebounds to the levels before the recession."
Calpine isn't free of warts. But it's unlikely to be a wholesale fraud. There's a good chance it isn't as disfigured as its stock price suggests.
Scott Herhold's Stocks.comment appears every Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail sherhold@sjmercury.com; phone (408) 920-5877. |
