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Origin Energy: Buy, hold or sell?

The management team of vertically integrated energy company Origin Energy (ASX: ORG) recently set off on an International Roadshow to promote the company’s credentials to overseas investors. A copy of the presentation was released to the market which you can view here.

While much of the presentation is just a repeat of the full-year results presentation, which is already familiar to investors and shareholders alike, a recent article in the Australian Financial Review honed in on a statement contained within both presentations that “whilst there are many improving trends in Energy Markets, the lagged effect of FY2013 discounts will delay earnings recovery in FY2014 with earnings growth evident from FY2015, driven by Origin’s legacy gas position and APLNG.”

The statement is a reminder to investors that estimates of earnings per share for FY 2015 and beyond are what investors should really be focussed on. Origin is currently still suffering from previous competitive threats which saw electricity and gas contracts discounted too aggressively in order to win market share.

Likewise Origin is still spending billions of dollars as it contributes its share of the funding for the massive Asia Pacific LNG (APLNG) Project. The combination of the APLNG project moving into production stage coupled with improved pricing within the Energy Markets division should lead to significantly higher EPS from FY 2015 and beyond.

According to data supplied by CommSec, Origin is forecast to earn 85.8 cents per share in FY 2015, up from 69.2 cps in the financial year to June 2013. With the stock currently trading at $14.51, this implies a two-year forward price-to-earnings (PE) ratio of 16.9. In comparison the S&P/ASX 300 Index (Index: ^AXKO) (ASX: XKO) is currently trading on a forward PE multiple for FY 2015 of 13.5 times, while peer AGL Energy (ASX: AGK), which has a lower expected earnings growth profile than Origin, is trading on an FY 2015 PE of 13 times.

Foolish takeaway

Given APLNG will have barely begun ramping up to full production by the time Origin reports its FY 2015 results there is still significant growth potential for earnings per share in FY 2016 and beyond. For this reason it would appear reasonable for Origin’s shares to be trading at a premium to the wider market.

Although a premium would appear deserved, investors should of course demand a margin of safety in the purchase price and as such waiting for a pullback in the share price before buying would appear to be the conservative course to take.

Origin should be able to ramp up its dividend payments in future years, however, for investors who want a big dividend-paying stock now, we’ve got one for you! Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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