Wednesday, January 16, 2008

Contact Energy looks bright during dark times

Electric companies are good
buys during times of turbulence.

With most media talking about the NZX and global indices's taking a bath since 2008 began, I thought I would take the initiative to write about business rather than the headless chooks that are dumping their stock, even though I have commented on the sad state of affairs of the current market tumbles.

Given that most stocks on the NZX have been routed recently there are some relative "bargains" worth a second look.

One that springs to mind given the very hot weather we have had in the North Island and the relative dry that the South Island has been experiencing is Contact Energy[CEN].

Contact's share price has been dropping from its high of NZ$9.70 towards the end of last year down to $7.97 today and is somewhat of a hedge against the turbulent times that we are currently experiencing.

Its profits will not be as negative as other consumer stocks in an economic downturn because people will still be using power and Contact is well placed in this respect.

It posted a full year profit to June 30 of NZ$239.6 million and is expected to report a net profit of NZ$220.8 million in the current fiscal year according to Reuters.

As I mentioned earlier, the extreme hot weather in the North Island, specifically in Auckland, where Contact has a large number of customers among its 650,000 odd, the air conditioning is bound to be running at full tilt.

Coupled with this, the dry Otago weather is good for Contact as Hydro power, which is the benchmark for power prices, will be more expensive to produce and cost consumers more but Contact has the edge because it has a large number of non hydro power stations, most notably their Otahuhu gas fired power station, and its geothermal belt around the centre of the North Island.

While there are a number of negatives the company faces, increasing gas prices and availability and the shut down of their New Plymouth power station, costing Contact $25 million in lost profit for the full 2008 year, the positives distinctly outweigh these negatives.

The probability that Contact's majority Australian owner, Origin Energy, will make another bid for the company is also another reason to pick up some of this stock because they would have to pay well north of 9 bucks to get it.

The sureness of a continued good cash flow and profit during uncertain economic times makes Contact worth a second look and the share price is at a more reasonable level for investors to make a good long term profit once some certainty returns to global sharemarkets.

Hopefully that will be soon.

Essential Links

Contact Energy Investor Centre
Origin Energy Corporate Website

Related Amazon Reading

Service Opportunities for Electric Utilities: Creating Differentiated Products (Topics in Regulatory Economics and Policy)

Service Opportunities for Electric Utilities: Creating Differentiated Products (Topics in Regulatory Economics and Policy)
Buy new: $189.00 / Used from: $63.69
Usually ships in 24 hours

c Share Investor 2008

No comments:

Post a Comment

Comment on Share Investor Stuff