Dear Mr. Berko: What is your opinion of Calpine Energy, which is in the same business as Enron that just declared bankruptcy? Calpine fell from a high of $58 to a low of $11 on Dec. 12, at which time I almost bought 200 shares. I got cold feet.
Please tell me if you think Calpine is OK to buy. There are so many negative news stories about the company that I’m not sure I can make the right choice to buy it or not to buy it.
Dear W.N.: I think California Pine may be some of the best pine in the world, and that Calpine (CPN-$15) may be one of the most undervalued stocks trading on the New York Stock Exchange. CPN, for those who don’t follow the trials and tribulations of independent energy producers, is a $6 billion power company that develops, acquires, owns and operates power generations facilities in the United States and Canada.
Revenues this year are a tad over $6 billion, up from $2.3 billion in 2000, which is up from $850 million in 1999. The only other industry with that kind of exponential growth is heroin and cocaine.
Well, this year CPN expects to generate more than $7.5 billion. Calpine is no Enron, and management recently reaffirmed that the company intends to meet its goal to produce 70,000 megawatts of power by 2005. Calpine collapsed, imploded, toppled, ruptured, disintegrated, crashed and crumbled from a high $58 a share this year to $11 just recently because the Enron debacle painted Calpine with the same brush. CPN has zero exposure to Enron, and CPN’s business model and approach to the marketplace preclude an Enron comparison.
While I thought that $58 a share is much too rich, I think the stock is worth at least 10 to 12 times 2002 earnings, which will be around $2.50 to $2.60 a share. The current $15 price is $1 under next year’s anticipated $16 book value and just under four times next year’s expected cash flow of $3.95 a share.
There are 15 brokerages that cover Calpine, and as of today 13 of them have a “strong buy” recommendation on the stock, while two rate Calpine as “buy.” Over the next year the projected high target price is $80, the mean target price is $49, the median target price is $48, and the low target price is $28.
I don’t like to purchase stocks that are going down in price. Rather, I’d prefer to buy stocks that are going up.
Dear Mr. Berko: Please tell me what a preferred stock is and how it is different from a common stock and a bond. I have two bonds that pay me more than 10 percent, and two that pay me over 17 percent. Can I get preferred stocks that would give me a good rate on my money?
Dear R.Y.: High yields are the principal attraction of preferred stock, which, like common stock, is an equity security. But the high yields to which you refer are like sky diving without a parachute. Everything is fine until you land.
Preferred shares represent a limited ownership in the issuing corporation but typically have no voting rights. Preferred stock is so-called for several reasons. The most important is that owners are entitled to receive their dividends before any payouts can be made on the common stock. And in almost all cases, the dividends are made at a fixed rate.
By contrast, the dividends on common stock can fluctuate up or down from year to year, depending on the company’s profit performance. If the company were to go out of business, the preferred shareholder’s claim on assets are senior to the common shareholder. But bondholders’ claims are senior to preferred shareholders.
The following are a couple of high-yield preferred issues that should provide you with speculative income between 10 percent and 20 percent.
American Airlines is a $20 billion revenue carrier. The company expects to lose more than $8 a share this year. However AMR’s 7.875 percent Preferred (AAR) stock maturing July 2004 trades at $20, yields 9.8 percent and is rated “BB.”
Host Marriott is a $1.4 billion revenue hotel owner. Its business has been hurt by the recession, and HMT may lose about a nickel a share but return to profitability by the second quarter of 2002. HMT’s $2.50 Preferred A (HMTA) trades at $24.50 and yields a solid 10.2 percent. The preferred has a B rating and is callable in 2004 at $25 a share.
Malcom Berko responds to every letter he receives; send questions to Berko, c/o Central Penn Business Journal, P.O. Box 1416, Boca Raton, Fla. 33429. Berko, senior vice president of the stockbrokerage firm Advest Inc., answers questions by mail or in his column free of charge. If readers want an in-depth analysis, they may be asked to become a Berko/Advest client.
Copley News Service