Is the AGL Energy (ASX:AGL) share price a value trap?

Value traps can be sneaky, so what do we need to consider for AGL Energy?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

As the AGL Energy Limited (ASX: AGL) share price slips further to the downside on Monday, some investors might be wondering if it is a cheap company that will keep getting cheaper.

Now trading for $5.65 at market close, the electricity generating and retailing company has evaporated 55.55% of its share price from this time a year ago. Even worse, shares in AGL Energy have tumbled 71.41% over the past 5 years, signifying value destruction en masse.

To put the underperformance into context — $10,000 invested in the S&P/ASX 200 Index (ASX: XJO) 5 years ago would now be worth ~$14,233 before dividends. Meanwhile, the same amount invested into AGL Energy would now be worth a disappointing ~$2,859 before dividends. That means an ASX investor would have been nearly 5 times better off in the Aussie index than in AGL shares by this time.

At present, AGL could be considered 'cheap' based on some valuation metrics. This poses the question, is the AGL share price a value trap waiting to leave its mark on another bunch of unsuspecting value investors. Or, is the company set to stage a comeback.

An orange sign with the word value against a blue cityscape, representing ASX value shares

Image source: Getty Images

Sometimes you get what you pay for

Typically, a lot of the metrics used for assessing 'value' are rear-facing. Whether it be a 12-month trailing price-to-earnings (P/E) ratio, price-to-book ratio, debt-to-equity ratio, or net tangible assets.

These financial tools are heavily weighted towards the road already travelled, not so much the road ahead. The danger hidden within this is the potential for the road ahead to be filled with even more potholes than experienced prior.

For example, AGL Energy's P/E ratio of ~10 at the end of June 2020 might have looked appealing. Especially when compared to the utilities industry average of nearly 20. Yet, now the AGL share price is far lower and has a negative P/E ratio due to its current unprofitability.

While there are often companies ripe for a contrarian approach, sometimes you get what you pay for. Often a company will be donning a low P/E ratio as a result of its less than appealing future outlook. In some cases, this unattractive future is exactly what plays out, pushing the share price lower.

What about the AGL Energy share price?

This brings us to the question: is the AGL Energy share price a value trap? It has appeared to be a prime example in recent years. However, to label it as a trap for future investors is not possible. Mostly because only time will reveal the answer.

Currently, the company is struggling through a loss-making period, a high debt-to-equity ratio, and a renewable shift that is putting the pinch on energy margins. The AGL Energy share price will be dependent on how the business structurally performs from here.

If profits resume and dividends are increased, then it will be shown it was a value trap no more. Whereas, if the company is unable to turn things around, the value trap could be on full display.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Energy Shares

a man in a business suit looks at a map of the world above a line up of oil barrels with a red arrow heading upwards above them, indicting rising oil prices.
Energy Shares

How ASX 200 energy shares like Santos, Beach and Woodside surged in March's sinking market

March saw investors pile into ASX 200 energy shares like Woodside, Santos and Beach.

Read more »

A miner stands in front of an excavator at a mine site.
Energy Shares

Why is this ASX energy stock racing 7% higher today?

A judicial review against a key project pushed the uranium share up.

Read more »

three businessmen high five each other outside an office building with graphic images of graphs and metrics superimposed on the shot.
Energy Shares

Why are AGL shares rising today?

The energy giant's shares are in the spotlight on Wednesday.

Read more »

a man wearing old fashioned aviator cap and goggles emerges from the top of a cannon pointed towards the sky. He is holding a phone and taking a selfie.
Energy Shares

Guess which ASX 300 uranium stock is rocketing today on a 'fantastic milestone'

Investors are piling into this ASX 300 uranium stock on Wednesday. But why?

Read more »

An oil refinery worker stands in front of an oil rig with his arms crossed and a smile on his face.
Energy Shares

4 ASX 200 energy shares rated buys

ASX 200 energy shares have skyrocketed 14% over the past month.

Read more »

Oil worker using a smartphone in front of an oil rig.
Energy Shares

Are investors taking a massive gamble by chasing the Woodside share price higher?

Woodside shares surge as oil prices and Middle East risks intensify.

Read more »

A man has a surprised and relieved expression on his face.
Energy Shares

Bell Potter says this ASX penny stock could rocket 90%

This is a high risk, high reward pick from the broker.

Read more »

Oil worker using a smartphone in front of an oil rig.
Energy Shares

Down 40% last week, are Amplitude Energy shares now a buy?

Should investors buy the dip?

Read more »