Expert's pick: Enron - this utility seeks to excel in a deregulated industry

Kiplinger's Personal Finance Magazine, Sept, 1998 by Stacy Stover

When it comes to stocks in his sector, Steven Lehman, manager of Federated Utility fund, favors "leading companies," leading in terms of either their assets or their managements. Top-flight management is more important than ever in selecting utility stocks, says Lehman, because deregulation and new competition mean that "utilities are facing unprecedented change."

One of his favorite stocks is Enron (symbol ENE, New York Stock Exchange, recent price $56; 713-853-6161). Enron, with a stock-market value of $19 billion, describes itself as the world's leading integrated natural-gas and electricity company. It owns a network of interstate natural-gas pipelines, as well as Portland General, an Oregon electric utility. It also owns 53% of publicly traded Enron Oil & Gas, an exploration and production company. In addition, Enron builds power plants and pipelines around the globe.

Lehman expects Enron to be one of the most successful players in what he describes as the largest sector of the economy ever to be deregulated: the electricity and natural-gas distribution markets, with combined annual revenues of $300 billion. Enron demonstrated its ability to take advantage of deregulation in the second quarter when it reported a surge in profits from wholesale-electricity trading. Lehman also cites Enron's purchase of Portland General last year as evidence of the company's foresight as it prepares for the deregulation of the huge California market. In addition to gaining from the deregulation of the U.S. energy market, Lehman sees Enron as a major beneficiary of the privatization of energy companies in developing markets; it is already involved in large construction projects in India and Latin America.

Though the stock has climbed from $35 last fall, Lehman still considers it a good value. Enron sells at about 28 times analysts' consensus estimates for 1998 of $2.02 per share. That's higher than the overall market's P/E of 25, but Enron's estimated rate of long-term earnings growth--15% per year--is roughly twice that of the market's.