Enron Corp.’s bloodletting continued Wednesday, as the stock price took another hit in extremely heavy volume, with close to 50 million shares trading hands. The stock finally closed at $16.54, down another $3.25, or 16.42%, from the previous day, after rocking back and forth as one of the biggest losers in early trading on the New York Stock Exchange. It reached a depth of $15.51 before climbing again. Pouring salt on the wound, several Wall Street analysts also cut their ratings Wednesday, including Prudential Securities, which advised its clients to sell.
The Houston-based energy trader has come under intense scrutiny about its accounting practices in the past week since releasing its third quarter earnings report, with most of the focus on related-party transactions that were begun and managed by CFO Andrew Fastow until last July. The U.S. Securities and Exchange Commission (SEC) has requested a review of the transactions, and Enron held a conference on Tuesday with the investment community to answer questions about the allegations (see Daily GPI, Oct. 24).
On Wednesday, the company put Fastow on an indefinite “leave of absence” and named Jeff McMahon the new CFO. McMahon had been president and COO of Enron Net Works, where he had responsibility for Enron’s e-commerce activities. “In my continued discussions with the financial community, it became clear to me that restoring investor confidence would require us to replace Andy as CFO,” CEO Ken Lay said in a statement.
“After much consideration, we are lowering our rating…not because of things we know but because of things we potentially don’t know about the company,” wrote Carol Coale, a Prudential analyst who covers Enron. Referring to Tuesday’s conference call with analysts and investors, Coale wrote that “management used the SEC inquiry as a shield to avoid elaboration on the issue at hand, the LJM transactions.”
Also lowering their ratings on Enron were FAC/Equities to “buy” from “strong buy” and JP Morgan, which lowered its rating from “buy” to “LT buy.” FAC also cut its target price on Enron to $32 a share from $80 and noted that the “financial leverage may trim core energy trading business growth.” In a research note, the firm said, “We are reducing our rating, 2002 estimate and target price for Enron principally out of concerns that financial liquidity — ‘the grease’ that drives its core energy trading business — has diminished so rapidly and dramatically.”
However, FAC noted that while the Tuesday conference call was “testy,” there were “some positives, vis-a-vis restoration of Enron’s financial strength” when the financial team at Enron revealed it still had “nearly $1.5 billion available under $3.5 billion in commercial bank lines” along with its three asset sales that will also reduce debt. FAC also said that Enron is, “to some extent almost a must trading partner in the industry.” In terms of valuation, and with the “damage…done to its share price,” FAC wrote that it believes Enron “may eventually get back to a 15-16 P/E multiple on next year’s earnings.”
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