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SarahGen (99.80)

Truly Terrible Earnings From a Utility (GXP) - Finding Some Stocks to Underperform

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February 11, 2009 – Comments (3) | RELATED TICKERS: GXP , BKH , PNM

Great Plains Energy (GXP): 86% lower profit, and a massively reduced dividend.  Didn't expect that from a utility did you?  Now we've seen a good half year of fear based investing, it's time to look closely at those 'safe havens'.  I suspect Great Plains Energy's 4 star CAPs rating wasn't achieved through pickers focusing on any deep analysis.  It probably got lumped in with a bunch of utility picks.  How could you have known how truly awful GXP was?  Wasn't too hard actually:

 

Sign 1 - The only detailed CAPS pitch was seriously negative

NtscribEnergy details why they're so negative on this utility in both 2006 and in 2007, the followup in 2007 starts with "the worst is not yet over".  Check out the pitch and replies here.  And there's another useful negative pitch from mdriver78 "Purchase of Aquila should be drain on earnings for the next year or so".  So true.

 

Sign 2 - Current Ratio under 1

The current ratio as defined on the fool.com glossary page:  provides a speedy indication of a company's ability to meet short-term debt obligations. The higher the ratio, the more liquid the company is, and the better able it is to take care of any short-term debt. To determine the ratio, take current assets and divide by current liabilities.

So a current ratio under 1 is pretty bad.  Maybe not as concerning in a stock you pick for spectacularly high growth, but not what you want to see with a staid boring utility you bought for the dividend.  

Higher current ratio is good.  Lower is bad.  GXP's current ratio is 0.7.

 

Sign 3 - A Huge Payout Ratio

Investopedia has this to say about the payout ratio: The payout ratio also indicates how well earnings support the dividend payments: the lower the ratio, the more secure the dividend because smaller dividends are easier to pay out than larger dividends. full investopedia definition here.

This is why you keep hearing the Dow Chemical CEO protesting that their dividend is 'safe', because no one believes it.  The Dow payout ratio is a whopping 271%.  No company can keep that up for long, because they're using up all their earnings and more just to pay out a dividend.  GXP's is still huge at 85%.

 

Summary

I did a quick screen on CAPS for utility stocks with a current ratio between 0 and 1, and a payout ratio over 50%.  There's quite a few to choose from.  I'll be looking at those, and picking a few.  I've dug up BKH, UIL, and PNM as new underperforms and I'm looking for more.

Do you have any utilities you  think are unsafe?  Got some underperform ideas?

 

 

 

 

 

3 Comments – Post Your Own

#1) On February 11, 2009 at 8:32 PM, MGDG (98.33) wrote:

Good blog, thanks for the info Sarah. Aquila was truly an under performing company when they bought it and I never did see how that was going to help their bottom line.

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#2) On February 11, 2009 at 10:50 PM, SarahGen (99.80) wrote:

Great instinct MGDG.  You were right on that thought about the acquisition. 

Got any other ideas?

I'm wondering if there's an easy way to check for who acquired what over the last two years - because in general I think most companies probably overpaid for what they got if they bought in 2007/2008.

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#3) On February 13, 2009 at 11:40 PM, Bays (99.68) wrote:

Current Ratio is one of the most important ratios during a time like this....   It's the companies with lots of cash and no debt... or mainly long-term debt... that will survive.   Having a ratio under 1 should be a strong sign not to purchase the stock...   Maybe during a bull market you would be able to justify it, but not now.

Good blog, Sarah.

 

 

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