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Entergy (ETR) Q2 2015 Results – Earnings Call Webcast

The following audio is from a conference call that will begin on August 04, 2015 at 11:00 AM ET. The audio will stream live while the call is active, and can be replayed upon its completion. Share this article with a colleague

Low P/E Stock Of The Day No. 5: Calpine Corporation

Summary The company is trading at TTM P/E of 8.8x. Environmentally operations mean that the company will face less regulatory issues. Increase in EPS is the result of favorable macro-conditions, increasing the Commodity Margin. In this series I will select a low P/E stock to analyze. I define low P/E as anywhere from 5x to 10x, as any lower and we may be looking at special situations. Calpine Corporation (NYSE: CPN ) is a U.S. power producer. The company primarily operates natural gas-fired and geothermal power plants and sells wholesale energy to corporate customers. Natural gas-fired generators use gas as fuel to power turbines while geothermal powered generators harness energy from hot water below Earth’s surface. At the end of 2014, the company had 88 plants in total. After beating its second quarter earnings, share shot up 10%. But the company is still trading at a TTM P/E ratio of 8.8x, well within our selection criteria. Let’s explore further and see if there may be an opportunity. The Business While the company generates power from renewable sources (geothermal) as well as fossil fuel (natural gas), the two methods share the common characteristic of being environmentally friendly. How geothermal energy is good for the environment is self-explanatory, but it may surprise you that natural gas is actually one of the cleanest fossil fuel options for electricity generation, emissions are virtually zero. Why is this important? In an increasingly stringent regulatory environment, non-environmentally friendly power generating methods (e.g. coal) are facing some tough challenges . This means that Calpine will not face similar legal issues in the future, decreasing the risk for shareholders. Making Sense Of The Numbers As evident by the above chart, revenue has been increasing since FYE 2012. However, this is not attributed to a larger turnover (i.e. electricity generation), as power generated did not vary much from year to year. The company generated 112 MMWh of power in 2012, 102 MMWh in 2013, and 100 MMWh in 2014. As you can see, the amount of power generated actually decreased, yet revenue still went up. This is possible because the price that the company gets per MWh fluctuates. This is called the Commodity Margin and it is impacted by a plethora of factors such as price of natural gas, economic growth, and environmental regulation. In a sense, this risk can be compared to the commodity risk faced by all energy producing companies. For the last couple of years, the company has benefited from favorable macro-factors (e.g. falling natural gas prices) that allowed it to increase its Commodity Margin. What does this mean? This means that earnings can be quite volatile. From the chart below we can see that both the operating margin and the EPS swings wildly from year to year. Conclusion The company does not face imminent challenges from regulators and should be around for a long time, but its financial results do not share the same outlook. The surge in EPS that the company experienced over the past couple of years can be largely attributed to extrinsic factors. This is the risk that you must be willing to bear if you want to invest in a wholesale power company. While favorable macro-environment factors will benefit the company (as they have done so for the past three years), the company cannot generate predictable earnings in the future, meaning that the low P/E ratio today does not necessarily translate to a cheap stock. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Problems With ‘The Short-Term’

Earlier this year I spoke about the problem of “the long-term” . This is the tendency for modern finance to emphasize a long-term view due to the fact that assets tend to perform well over the long term. This is empirically true. If we look at the performance of stocks, bonds and the broader economy the performance tends to skew to the upside the longer your perspective is. Unfortunately, as I’ve noted, everyone doesn’t have a “long-term”. In fact, even most young people live a life of short-terms inside of a long-term. Our financial lives aren’t this start-and-stop ride where we get on when we’re young and get off when we retire. At times the ride stops along the way and we have to get off for marriages, new homes, college expenses, emergencies, etc. That said, we also shouldn’t be in the financial markets if we have a short-term perspective. That is, given that you have to expose yourself to principal risk with any financial instrument with more than a few months of duration, you can’t be remotely long-term if you have no stomach for principal loss. This is particularly pertinent at times like these when we’re going through a substantial commodity unwind and foreign market turmoil. It’s a near certainty that any well-diversified portfolio has at least some exposure to these events. The reality is that most of us have a multi-temporal or a cyclical time frame of the financial world. It’s neither a long-term nor a short-term. It’s usually something in the middle. And when we veer too far in one direction or the other we tend to get in trouble. The problem with the short-term is multifaceted: A short-term view tends to result in account churning, higher fees, higher taxes and lower real, real returns. A short-term view often results in reacting to events AFTER the fact rather than knowing that a well-diversified portfolio is always going to experience some positions that perform poorly in the short term. Short-term views are generally consistent with attempts to “beat the market” which is a goal that most people have no business trying to achieve when they allocate their savings. If you have an excessively short time horizon you probably aren’t going to respond well to market turmoil. I’ve found that there is nothing more difficult in the investment world than understanding how the concept of time applies to someone’s portfolio. As with so many things in life the truth often resides somewhere in the middle. And if you can maintain that cyclical view without being irrationally long-term or short-term you’re very likely to achieve performance that is in line with your broader financial goals. Share this article with a colleague