December 3, 2001; McDep Ratios Down for High Fliers, But Still Moderately High

We had no idea Enron would collapse so spectacularly.  We did realize that the stock had high valuation risk.  Other high McDep Ratio companies have seen that measure decline as well (see Chart). 

  Each of the five stocks also have high financial risk signaled by ratios of Debt/Present Value that we display next to the McDep Ratio in valuation tables.  We are also cynics about the extraordinary leverage, mostly undisclosed, in derivatives.  Leverage allows smart persons to make a lot of money quickly.  Too often those persons attribute too much of their success to themselves rather than to luck magnified by leverage. 

We do take a stand recommending the sale of Calpine.  The McDep Ratio on Calpine doesn't look as menacing as it did.  However, the denominator of the ratio may be overstated as it depends on the validity of the company's reported financial results.   

We know that Dynegy is in volatile businesses and in the past it has been a volatile stock. We like Mr. Watson, but thought his use of a professional golf tournament sponsored by his company to televise his own image was a questionable use of stockholder funds.  Nor was Dynegy too thoughtful in its proposed rescue of Enron.  If the aim was to acquire some of Enron's assets on the cheap it will be at the expense of Enron's customers.  Dynegy will do well to remember that the very parties it attempts to disadvantage are also Dynegy's customers. 

AES has been another industry success story to this point.  The company has many power projects in developing countries.  Diversified by country, the projects are not overly exposed to a single political regime, but do depend heavily on world economic progress, as do all emerging countries.  Meanwhile AES has high financial risk with the highest ratio of debt to present value of large companies in our coverage.  By comparison, our China energy company recommendations, PTR and CEO, share the developing country risk of AES, but have much lower valuation risk and financial risk than AES.