One of the worst performers on the Australian share market on Wednesday was the AGL Energy Ltd (ASX: AGL) share price.
The energy company’s shares finished the day 7% lower at $21.17.
Why did AGL Energy Ltd shares crash lower?
Although the market sank notably lower today, AGL Energy’s shares fell more than most following the release of a reasonably bearish broker note out of Credit Suisse.
According to the note, the broker has held firm with its neutral rating but cut the price target on AGL Energy’s shares to $22.90.
Credit Suisse made the move due to concerns that the recent reduction in retail prices by AGL Energy and rivals including Origin Energy Ltd (ASX: ORG) is a sign that competition is increasing.
The broker recently ran a survey which revealed that AGL Energy has been price matching in the Queensland and South Australia markets and has given back the price increases from the start of this year in Victoria.
As this was greater than expected, the broker expects the price reductions will mean that AGL Energy’s margins come under pressure in FY 2019.
Interestingly, the broker remains optimistic on Origin Energy and has maintained its outperform rating on its shares. Credit Suisse has a price target of $10.60 on Origin Energy’s shares, equating to potential upside of almost 10% from today’s close price.
Should you buy the dip?
Credit Suisse expects AGL Energy to achieve earnings per share of $1.60 in FY 2019, meaning its shares are changing hands at 13x forward earnings.
While this looks to be reasonable value, I wouldn’t be a buyer of its shares just yet due to concerns over future prices.
This morning the Australian Competition and Consumer Commission (ACCC) released the final report of its electricity supply and prices inquiry. The ACCC believes there is a serious electricity affordability problem for consumers and businesses. As such, it has declared the national electricity market broken and says it needs to be reset.
I fear this could lead to energy prices coming under pressure, potentially weighing further on the performance of AGL Energy and its peers.
Until more is known, I would stay away from AGL, Origin, and Spark Infrastructure Group (ASX: SKI)
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.