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AGL Energy: Buy or sell?

Just what to make of AGL Energy (ASX: AGK) is a tough question. The market seems to have almost conflicting views on where the $8.1 billion energy giant, which operates retail and merchant energy businesses, power generation and upstream gas assets, is headed. It has fought off some disconcerting news recently to keep its stock price fairly stable.

Mid-session Wednesday, it was trading in the low $14.80s, but not doing not quite as well as the overall market. However, after struggling to keep up with the S&P/ASX 200 Utilities Index (ASX: XUJ) in the past year, since June 21 it has been outstripping it, recovering from a June 13 low of $13.89 after a mid-March high of $16.60.

After tracking in the low $14s for the past couple of months, AGL looks to be heading back in line with recent market rises to the $15 mark. Morningstar has an intrinsic value of $16 and a hold recommenation on it, a reduction from accumulate. Analysts Activo (from unfavourable to most unfavourable) and Columbine (from buy to hold) also downgraded it in the past few days.

It had come as a surprise to many that CommSec early last month had upgraded its rating on AGL from neutral to overweight, despite decreasing its 12-month price target to $16.85 and downgrading its FY14 earnings forecast. That was when AGL was trading at $14.24.

Comsec’s assessment was largely based on the broker’s confidence that the company could withstand a 12-18 month delay in developing its Gloucester acreage. There are concerns that delays could mean AGL losing some of its higher margin gas customers.  The broker said the investment case was also supported by three-year earnings per share growth and a projected compound annual growth rate of 9%.

So in hindsight Comsec’s call at $14.24 seems to have been borne out in the past few weeks, but now that AGL looks to be heading back to over $15 perhaps much of the window of opportunity has already closed.

AGL had a great run in the first half of fiscal 2013. It increased customer numbers and profit margins while competitors struggled. But now price competition is closing in and projected profit targets are looking to be under pressure.

Current investors would seem to have little reason to dump the stock. Its price-to-earnings ratio of 13.3 is one of the lowest in its sector, and it has a dividend yield of 4.2%. But perhaps new investors shouldn’t be rushing in at current prices to add it to their portfolio.

Foolish takeaway

AGL Energy is getting mixed reviews from market analysts. That doesn’t help investors deciding their position. Certainly, there seems little downside in holding it longer term, but there might not be that much upside short-term either.

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Motley Fool contributor Andrew Ballard owns shares in AGL. 

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