Should I buy AGL shares at under $7 each?

The AGL Energy Limited (ASX: AGL) share price has sunk lower again. It's down 14.5% since the beginning of 2023.

It has been a difficult time for the business over the last few years. Its leadership team have been replaced, profit has been falling and the AGL share price has declined by almost 70% since the start of 2020.

But, while the AGL share price has fallen, it's worthwhile noting that, at some point, the AGL share price may become undervalued. It could already be at that point.

What's been going wrong for AGL shares?

The latest result was an excellent example of the types of things that are going wrong for the business.

In the first six months of FY23, AGL reported that its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 16% to $604 million, while underlying net profit after tax (NPAT) declined 55% to $87 million.

AGL reported a statutory loss after tax of $1.075 billion, including $706 million of impairment charges after tax.

The impairment charges related to the carrying value of the AGL energy generation fleet cash-generating unit, largely as a result of the decision to accelerate the targeted closure date of AGL's thermal coal generation assets.

AGL's statutory result was also impacted by a negative movement in the 'fair value of financial instruments', to the tune of $622 million, which primarily reflected the "impact of a drop in forward prices for electricity relative to AGL's hedging of its electricity generation position".

The business has also suffered from outages of its power generation.

AGL shares can be impacted by its guidance because the market is forward-looking. AGL's underlying NPAT for FY23 is expected to be between $200 million to $280 million. It's expecting more energy generation in the second half, with an improvement in the customer margin.

Is the AGL share price a buy right now?

AGL thinks the outlook beyond FY23 is "positive", with wholesale pricing remaining "elevated compared to prior periods with AGL expected to benefit as historical contract positions are reset in FY24 and FY25."

On top of that, "sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes."

AGL is on a path to investing heavily in renewable energy to replace coal. That will help its green credentials and, while there's a hefty price tag, AGL will generate earnings from its green energy assets.

Analyst estimates suggest that AGL could generate much higher earnings in the coming years. In FY25, AGL could generate earnings per share (EPS) of 97 cents and pay a dividend per share of 70 cents, according to Commsec.

That puts the current AGL share price at 7 times FY25's estimated earnings, with a possible dividend yield of 10.2%, excluding the effect of franking credits.

While it's not the most exciting business around, the prospect of much-improved earnings in FY24 and FY25 is compelling and the current valuation could prove cheap.

Valuation snapshot

According to the ASX, the AGL market capitalisation is $4.6 billion.