EUCOM Economic Analysis - Part I

[Firn]

Look at how renewable energies are being subsided; a fixed prices system.

Small providers can deliver renewable energy electricity into one of the big four's nets and get a high, fixed price for it.

The big providers can't do this with their own net, as they would pay themselves. In the end, renewable energy electricity in their own area would have the actual price, and they love their old nuclear powerplants with all their thoroughly hidden and externalised costs sooo much.

Moreover, it doesn't make sense to go to another big provider's area and infuse renewable energy electricity there. They could take revenge and do the same in your area, and there you're effectively back at the original case of selling to yourself.

What they have is for PR and for having competence cores about the stuff.

It is certainly interesting how the variable incentives for renewable energy influence the market behavior. This is of course the E.ON CEO speaking, but it seems the alignment of the incentives is a problem as well as the insufficient integration of the national and European grids.

Die Zeit has an interview with Johannes Teyssen. DIE ZEIT, 21.6.2012 Nr. 26

ZEIT: Dass einzelne Stadtteile vom Netz abgeklemmt werden knnten, klingt beunruhigend.

Teyssen: Es gibt in Europa genug Strom, auch in Deutschland. Trotzdem werden wir in den nchsten Jahren regionale, aber beherrschbare Engpsse erleben. Natrlich werden wir Stromleitungen und neue Kraftwerke bauen mssen. Technisch ist all das organisierbar. Die Frage wird sein, ob wir unsere Energiesysteme effizient und bezahlbar umbauen. Heute knnen Sie zum Beispiel einen Windpark bauen, wo es gar kein Netz gibt, und bekommen den Strom auch dann bezahlt, wenn er gar nicht eingespeist werden kann.

ZEIT: Welche Rolle spielt dabei der Emissionshandel?

Teyssen: Der ist leider vllig verkommen.

ZEIT: Warum?

Teyssen: Weil eine Tonne CO₂ im Emissionshandelssystem nur noch rund sechs Euro kostet, also viel zu wenig fr einen Investitionsanreiz. Gleichzeitig zahlen wir in anderen Systemen, beispielsweise bei der Frderung erneuerbarer Energien, mehrere Hundert Euro pro Tonne vermiedenes CO₂. Das ist absurd.

About the overall energy mix of E.ON which is of course does not operate only in Germany.

ZEIT: Reden wir ber die erneuerbaren Energien. Deren Wachstum ist fr ein Unternehmen wie E.on, das immer noch mehr als 80 Prozent seines Stroms aus konventionellen Energien erzeugt, ein richtiges rgernis, oder?

Teyssen: Nein. Wir haben 3.000 Megawatt Wasserkraftstrom und inzwischen sogar noch mehr installierte Leistung bei den Windkraftanlagen, nmlich nahezu 4.000 Megawatt. Wir sind einer der Weltmarktfhrer bei den erneuerbaren Energien.

ZEIT: Aber nicht in Deutschland. 198 Megawatt Windkraft haben Sie in Deutschland, diese Leistung entspricht rund einem Prozent der Leistung aller deutschen E.on-Kraftwerke.

Teyssen: Wir bauen vor Amrum fr rund eine Milliarde Euro einen der grten Offshore-Windparks in der deutschen Nordsee. Abgesehen davon: Wo ist das Problem? Ist es fr den Klimaschutz wirklich wichtig, ob ein Windpark in dnischen, britischen, schwedischen oder deutschen Hoheitsgewssern gebaut wird? Weltmarktfhrer wird man in der Welt, nicht in Deutschland.

Their market share in Germany will fall, which is of course one of the reasons they are investing in other geographical areas as well as trying to get a stronger foothold in the renewable sector.

ZEIT: Die Energiewende findet aber in Deutschland statt.

Teyssen: Aber Deutschland kann die Welt nicht retten. Nicht umsonst beschreibt das Energieprogramm der Bundesregierung, wie sich in Deutschland ein klimavertrgliches Energiesystem im europischen Kontext entwickeln lsst. Ohne die Solidaritt und die Einbindung in Europa geht es nicht. Wer bei der Energiewende national denkt, denkt zu klein. Deshalb bleibe ich dabei: Es ist richtig, dass wir als E.on dort in erneuerbare Energien investieren, wo wir die schnellsten Lernerfahrungen machen knnen. Und das geht bei der Windenergie etwa in den USA. Die Erfahrung, die wir da machen, bringen wir nach Deutschland zurck.

ZEIT: Dazu zwingen Sie die Umstnde. Weil Kernkraft und Kohle laut offiziellem Kurs keine groe Zukunft mehr haben, muss E.on grner werden oder kleiner.

Teyssen: Beides. Ich bin ich davon berzeugt, dass unser Marktanteil in Deutschland zwingend und nachhaltig sinken wird. Es ist nicht mglich, dass wir in einer strker dezentralisierten Energiewelt den gleichen Marktanteil halten, etwas weniger als 15 Prozent in der Stromerzeugung. Aber unabhngig vom Marktanteil, muss E.on sich zu einem Konzern weiterentwickeln, der noch strker als bisher auf dezentrale und erneuerbare Energien aufbaut.

No surprise that he is against the forced intake at a fixed price of every watt of renewable power and there are good arguments on his side. Said that this principle was the key to quickly unlocked the market for green energy. From a owners point of view and a fan of technological progress I hope that the increasing competivness of the renewable sector will lead to a decrease of the fixed price and that E.ON is able to increase it's earnings per share.

ZEIT: Im Prinzip haben Sie nichts gegen das EEG, auch nicht gegen den Einspeisevorrang?

Teyssen: Den unbedingten Einspeisevorrang, den rate ich dringend zu berdenken. Fr die letzte Stunde Photovoltaik am sonnigsten Tag des Jahres msste sonst das Netz fr viel Geld und gegen groe Widerstnde ausgebaut werden. Wahnsinn. Vom Markt her sind Sonne und Wind sowieso vorne, denn sie verursachen ja keine Brennstoffkosten.

ZEIT: Sind die Deutschen eigentlich reif fr die Energiewende?

Teyssen: Ja, klar. Wer soll es schaffen, wenn nicht wir?

P.S: I did buy a considerable amount of E.ON stock today as I think the value is still good and that price was certainly attractive.

[Surferbeetle]

P.S: I did buy a considerable amount of E.ON stock today as I think the value is still good and that price was certainly attractive.

It's tough to go against the grain, buy when everybody is scared, but that is also a time when I do best. Good luck.

I do have some questions for you, if you are up for it. I'll outline my process and would appreciate any tips that you are willing to share?

Data gathering seems to be just about as important as analysis for making profitable decisions. Free is always good and so I regularly use sites such as Marketwatch (http://www.marketwatch.com/investing...countrycode=XE ), Finanzen.ch (http://www.finanzen.ch/aktien/E.ON-Aktie ), Yahoo Finance ( http://finance.yahoo.com/q?s=EONGY&ql=1 ), Google Finance ( http://www.google.com/finance?q=eong...Mi7DsHXqAGnjAE ), Seeking Alpha ( http://seekingalpha.com/symbol/eongy.pk ) and of course the company website (http://www.eon.com/en/investors.html ). Paid and unpaid newspaper subscriptions help with the macro background and trade newspapers and magazines help to further zoom in. Next, I am aware of and sometimes use, paid providers such as the Economist Intelligence Unit and Moody's Investors Service to further zero in on important nuances. In my mind a Bloomberg terminal would be the pinnacle of data gathering capability, but I have never used one (renting is pricey) so perhaps I am being captured by the hype.

As to EON analysis, I have not done any homework but, I have read that ~35 percent of Euro energy comes from renewables and this figure is set to rise significantly over the next couple of decades. Geopolitics are very tough, and I suspect this is part of what is driving this significant effort towards self supplying energy via renewables. Fortunately debt is cheap at this time and EON appears to be able to sustain it's 35 billion Euro debt (or so) and I note that it has ~150 billion Euro in assets. Tangible book value per share is 7.76 Euro today, today's price at the moment is 14.27 Euro, the 52 week low is 14.05 Euro, around 14.3 million shares have changed hands today, and approximately 75,000 employees generated ~140 billion Euros in revenue last year. I have not compared these numbers with the typical utility in German or outside of Germany (such as EDF in France). Out of 38 analysts covering the stock, 13 say buy (I usually ignore these recommendations).

What can I do better?

[Firn]

It's tough to go against the grain, buy when everybody is scared, but that is also a time when I do best. Good luck.

Good luck always helps, I hink we will see if it was a wise decision in a couple of years.

I do have some questions for you, if you are up for it. I'll outline my process and would appreciate any tips that you are willing to share?

Data gathering seems to be just about as important as analysis for making profitable decisions. Free is always good and so I regularly use sites such as Marketwatch (http://www.marketwatch.com/investing...countrycode=XE ), Finanzen.ch (http://www.finanzen.ch/aktien/E.ON-Aktie ), Yahoo Finance ( http://finance.yahoo.com/q?s=EONGY&ql=1 ), Google Finance ( http://www.google.com/finance?q=eong...Mi7DsHXqAGnjAE ), Seeking Alpha ( http://seekingalpha.com/symbol/eongy.pk ) and of course the company website (http://www.eon.com/en/investors.html ). Paid and unpaid newspaper subscriptions help with the macro background and trade newspapers and magazines help to further zoom in. Next, I am aware of and sometimes use, paid providers such as the Economist Intelligence Unit and Moody's Investors Service to further zero in on important nuances. In my mind a Bloomberg terminal would be the pinnacle of data gathering capability, but I have never used one (renting is pricey) so perhaps I am being captured by the hype.

What can I do better?

Well of course I'm in no position to know that. In general I follow the framework set up by Graham and Buffet and try to stick to it, which is surprisingly hard. Grahams filters work pretty well to sort get stocks which deserve a closer look, but he is arguably a bit too restrictive on book value.

You are also using pretty much the same ressources as I do, I have completely given up to listen to 'insider' information. Apart from the facts and the experience there is now a little nice story of a friend of mind. He became one of Americas 1% or less and sold a year or two ago part of the stock of the company in which he worked at less then 1/3 of the price I got only a month or so ago. He had of course far far more of it and invested considerable time in getting the decision right (he no longer works regulary) and despite all the odds favoring him luck and a layed back-approach worked this time better.

Krugman had recently an entry on the issue in general. Kahnemann argues in a similar way. Obviously the discussion is about certain complex topics with a lot of uncertainty. In other areas expert knowledge and insider knowhow are golden.

P.S: The German Wiki does have a decent overview of the history of E.ON. Needless to say that the Jahresabschluss is full of info. Maybe we could start a bit more detailed European discussion about it. In general I would say that Europe-wide the utilities are trading for low prices. The big question is of course if the those prices are low enough under their long-term value to give you a good margin of security.

P.P.S: Eurokrise ebnet VW den Weg zur Herrschaft

VW als "sicherer Hafen" in der Krise

"Volkswagen ist ein sicherer Hafen geworden", sagt VW-Finanzvorstand Hans-Dieter Pötsch."

Und es ist nicht nur VW. Die Münchener Siemens AG refinanzierte sich im August am Anleihemarkt so günstig wie nie zuvor. Die Rendite, die Siemens bieten musste, lag sogar unter dem, was gleichzeitig für französische Staatsanleihen mit „AAA"-Rating am Markt bezahlt wurde.

Im Durchschnitt mussten deutsche Unternehmen wie BASF, Linde oder die VW-Nutzfahrzeugtochter MAN zuletzt am Anleihemarkt einen Aufschlag von 1,9 Prozentpunkten auf einen Referenzzinssatz zahlen, der sich an den EZB-Leitzinsen orientiert, zeigen Daten von Dealogic. Bei italienischen Firmen betrug die Prämie 4,2 Prozentpunkte, bei spanischen 4,65.

The 'Kupon' you get on bonds of solid German enterprises is really low indeed. Offers deemed decent to good are snatched up quickly by the big boys. That over 2% more are a problem for Italian companies in competition with German ones is no surprise.

[Surferbeetle]

Maybe we could start a bit more detailed European discussion about it. In general I would say that Europe-wide the utilities are trading for low prices. The big question is of course if the those prices are low enough under their long-term value to give you a good margin of security.

Good post, thanks for the links, and I am willing to discuss further. Will have to do some additional reading and thinking and will get back to you in a week or so.

In the meantime, here is a story that I am mulling over:

U.S. Rethinks Security As Mideast Oil Imports Drop, by Tom Gjelten, Nov 14, 2012, NPR, http://www.npr.org/2012/11/13/165052...op?ft=1&f=1001

The sharply reduced dependence on Persian Gulf oil is raising questions about whether the Carter Doctrine should still apply.

If protecting the Persian Gulf oil supply doesn't matter so much anymore, would that justify some U.S. disengagement from the Middle East?

Persian Gulf oil will remain important, and somebody will need to secure those Gulf shipping lanes. China, poised to become the No. 1 buyer of Gulf oil, is now benefiting from the huge U.S. security presence in the region. Perhaps the United States could turn over security responsibilities in the Persian Gulf to China.

"Strategically, that's not something we really want to do," says Herberg. "But in an oil sense they are now the prime beneficiary of this. [They are a] free rider on these free sea lanes the U.S. keeps open. So how do you manage that conflict?"

"It's insane that we have the 5th Fleet of the U.S. Navy tied up there to protect oil that ends up in China and Europe," T. Boone Pickens, the energy tycoon, was quoted as saying recently in Parade magazine.

[Fuchs]

I'm always amazed that people think public info would be good for investing.
Whatever info is public IS PUBLIC. How is this supposed to offer an advantage over the others?

[Surferbeetle]

@Fuchs

One doesn't have to cheat in order to win.

There is gobs of public info out there and it is my sense that not all of that info gets to the market instantaneously nor efficiently (flying in the face of some of the tenants of the efficient market hypothesis ).

Firn has rightly recommended Benjamin Graham's book the Intelligent Investor as worth a read. I second his recommendation...Mr. Market sometimes drops by with some craaazzzyyy pricing on stocks...enough value that one can later sell those same stocks and cover one's beer and pretzels expenses for the year.

[Fuchs]

Surferbeetle, the people who buy or sell shares (and stuff) define the market price, not the ones who hold it.
The people who buy or sell can also be expected to have recently paid attention to news more than the holders.

I understand others people who read financial news or listen to them on TV believe they have info, but this info is basically already priced in. Whatever unsystematic distortion happens between info and conclusion tends to affect both you and all the others (buyers, sellers) on average. The market price is already aggregated including the info you get from reading or watching public info.
To believe that you get an advantage from such sources is about the same as to believe that you can process the info better than the one you're trading with. There's little reason to believe this to be systematically true.

Professionals who spend 60 hrs/week with consuming, discussing and digesting publicly and non-publicly available information on a narrow segment of the market get rich if they're correct more than 51% of the time. It's in my opinion delusional to believe you can beat your trading partner this way.

Or in another way: It's like believing that you can make profit in the betting market for sports because you are watching sports matches.



Focus on avoiding systemic risks and on keeping fees small instead and enjoy life by not looking at your shares' development or useless financial "news" more than monthly or quarterly.
A more thorough analysis makes only sense if you've got enough capital to diversify AND justify the expenses of a thorough analysis of a specific company, preferably a Ltd.