Portrait of a sector:
PNM Resources (PNM:NYSE - news - commentary - research - analysis) set the tone by slashing its second-quarter guidance in half and its full-year earnings expectations by nearly one-third. The Albuquerque, N.M., company blamed its sharp downturn on low wholesale power prices and ongoing problems in the energy trading sector.
Investors responded to PNM's news, issued after Tuesday's market close, by pounding the stock to a price unseen in more than two years. It closed with a $3.50 loss at $18.92.
PNM Chief Executive Jeff Sterba predicted little chance of a rebound before year's end.
"Although the PNM electric utility continues to perform well, the depressed level of wholesale energy prices in the West, coupled with the significantly decreased trading activity in that market, has severely limited the potential of our power marketing arm so far this year," Sterba said. "We are lowering our earnings expectations because it appears increasingly likely that these adverse conditions will persist through the end of 2002."
The company is now predicting second-quarter earnings of 25 cents a share and full-year earnings of $1.90 to $2.10. Analysts were expecting 53 cents and $2.64 for those periods.
Following PNM's reduced guidance, both Banc of America Securities and Merrill Lynch downgraded the stock.
Banc of America now rates the stock market performer instead of buy. In a research note issued Tuesday, analyst Shelby Tucker said he expects PNM to deliver "historical average utility earnings levels with no credit given for power marketing." He lowered his PNM earnings guidance from $2.75 to $1.90 for 2002 and from $3 to $2 for 2003.
Similarly, Merrill Lynch analyst Steven Fleishman downgraded PNM from buy/strong buy to neutral/buy.
While PNM bore the brunt of Wednesday's punishment, companies throughout the sector -- even favorites like Duke (DKE:NYSE - news - commentary - research - analysis) -- suffered a beating. Following its own downgrade, Duke tumbled $1.60 to finish Wednesday at a 52-week low of $19.95. (WRONG, DUK closed at 26, still a 52-week low)
One Houston energy analyst described the market's current reaction to utility stocks as irrational.
"Duke started to get in trouble yesterday because of a few minor issues with the Public Utility Commission," said John Olson, an analyst at Sanders Morris Harris who owns stock in the North Carolina company. "That created just enough of a spark to launch what turned out to be a forest fire."
Olson went on to say that the entire stock market continues to be darkened by accounting scandals and mounting investor suspicions.
"Every sector in the market is being affected by headline risk," he said. "And when you have that kind of climate, the short sellers just have a field day.
"They tend to badmouth everybody."
Several energy trading companies continued to be favorite targets Wednesday. Mirant (MIR:NYSE - news - commentary - research - analysis) emerged as the hardest hit, tumbling 72 cents to a new low of $4.29.
Lasan Johong, an analyst at Blaylock & Partners, speculated that investors are growing increasingly nervous about Mirant's ability to renew a revolving credit facility set to expire next week. In addition, he said, they could be bracing themselves for bad news about Mirant's energy trading practices in California.
The Federal Energy Regulatory Commission is expected to report its findings on the California trading practices of many companies later this month.
"Everybody is waiting to see who FERC will declare as the culprits," Johong said. "Mirant is potentially still one of them."
Johong, who doesn't own the stock, has a buy rating and $23 price target for Mirant.
Wednesday's other battered energy stocks included: Dominion (D:NYSE - news - commentary - research - analysis), down $3.43 to $59.71; Entergy (ETR:NYSE - news - commentary - research - analysis), down $2.48 to $38.77; Reliant (REI:NYSE - news - commentary - research - analysis), down 85 cents to $15.30; Calpine (CPN:NYSE - news - commentary - research - analysis), down 53 cents to $5.35; and Dynegy (DYN:NYSE - news - commentary - research - analysis), down 49 cents to $5.66. |
