Tag archive for "energy stocks"

Barron's 400 Diary

New B400 Looks Ready to Uphold ‘Growth’ Tradition

No Comments 24 March 2014

There is a lot of interest in the newly reconstituted Barron’s 400 Index, and the question underlying much of it is: Are the companies in it starting today as “growthy” as the old bunch?

It sure looks like they are. Positive growth and value characteristics are among the 24 factors used by MarketGrader to evaluate some 6,000 U.S. stocks daily and to choose this set of components for the index. It is the combination of these factors with the overall financial strength of the selected companies that puts the Barron’s 400 in the category of “growth at a reasonable price.”

One way to check out growth prospects is to see how the new 400 have performed in the recent past. We did that by sorting the companies into their sectors, adding up their net income and revenue for the most recent trailing 12 months and comparing those totals with the same period a year earlier. Here are the results:

Net Income

Revenue

Consumer Discretionary

29.76%

5.99%

Consumer Staples

33.89%

3.09%

Energy

73.85%

-0.21%

Financials

29.17%

5.84%

Health Care

16.34%

10.23%

Industrials

50.86%

6.45%

Materials

24.87%

3.33%

Technology

7.42%

6.90%

Racking up double-digit profit gains on mostly moderate revenue increases shows that these companies know how to grow efficiently. Six of the sectors surpassed the average five-year annual growth rate in per-share earnings for the index’s former components of 22.2%, a figure inflated a bit by share buybacks.

The laggard, technology, is in position now to reap the benefits of greater capital spending to boost productivity as the economy moves to a new level and jobs must be added to increase output. Energy looks like the winner with its ballooning profit and slight revenue decline, but it’s really an anomaly. Sales are down because of the increasing supply of fuels, which caused a pullback in exploration and development of new sources. It is that temporary retreat which caused the profit spike. In time, the industry will get back to normal.

Here are two more data points that buttress the expectation that the refreshed Barron’s 400 will uphold the growth tradition. First, the index’s forward price-earnings ratio—based on security analysts’ forecasts for this year—is 17.6, a full point below the last reading on the former component set. Second, the return on equity for the new components averages 50.5%, compared to 27.5% for the old set. In short, the valuation of the Barron’s 400 has some room to grow and history suggests this new set of companies is experienced in growing their stock prices.

Mr. Market will have a lot to say about how these numbers will look down the road. But here at the starting line of a six-month run for these companies and stocks, the Barron’s 400 appears to be in great shape to take advantage of every break that comes our way.

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By the Numbers

Contrarian View: Buy European Stocks

No Comments 14 January 2012

With the stock market off to a solid start two weeks into the new year and following a string of mostly positive economic reports, investors have warmed up pretty quickly to U.S. equities. This, of course, has been playing out for a couple of months as market pundits and equity strategists developed and announced their predictions for the new year. While we mostly subscribe to the view that U.S. stocks seem well positioned for a decent run in the years ahead, especially as the U.S economy continues to recover and the Europeans slowly sort out their fiscal mess, we have started to look at European equities as perhaps the best place to hide from the crowd. More specifically, as investors shun the stocks of European companies simply by virtue of their domicile, we think several companies offer compelling investing opportunities for those willing to tune out all the noise.

MarketGrader.com does not yet grade companies listed in European exchanges, so our analysis is mostly limited to those with American Depositary Shares. More specifically we have looked for companies with strong MarketGrader scores, of course, but also with compelling valuations and a significant share of their business generated outside of Europe’s sickest areas in the continent’s indebted south. And those domiciled in countries with their own currencies, and thus monetary policies independent of the ECB, seem to us to offer even greater appeal. Among them we find a handful we’ll be highlighting in this column in coming days. The first one, and perhaps one of our three favorites, is Statoil ASA ADS (NYSE: STO).

Statoil is Norway’s national oil company. It generates 78% of its revenue in Norway, 10% in the U.S. and another 10% across the rest of the world. While Brent crude has traded around $110 a barrel for the better part of the last year, the Norwegian Krone has depreciated by approximately 15% in the last six months against the U.S. dollar, mostly because of the strengthening of U.S. economic indicators, a dynamic that boosts the value of the company’s dollar-based revenues. And as it happens to be, Statoil, with an overall grade of 78.8 (out of 100,) is the highest ranked company among the 18 oil ‘majors’ followed by our system and classified in the Integrated Oil industry. Chevron and Suncor Energy round out the top three in the group.

Statoil’s 12-month trailing net income of $11.4 billion is up 25% from three years ago, which might not seem like a hit-it-out-of-the-park number but considering that in the depths of the global recession two years ago, for the 12-month period ended in September of 2009, the company earned $2.08 billion, the latest results reveal a remarkable comeback as energy demand roared back to life. Of particular importance is the fact that even though capital expenditures have been growing at a year-over-year clip of about 25% in the last four quarters, the company’s free cash flow last quarter almost tripled from the year-earlier period. This helps explain an across the board margin expansion in the last 12 months, with EBITDA margin at an impressive 41.7% and operating margin of 29%.

Statoil’s stock trades at only seven times trailing 12-month earnings despite a two-year EPS growth rate of 134%. Its P/E based on the next 12 month’s earnings estimates is only 9. Furthermore, if the company’s $17.04 billion in cash is subtracted from its valuation, the stock’s trailing P/E would fall to a ridiculously low 5.7.

It’s important too that investors understand the company’s ownership structure, which we think adds to its appeal. The number of shares outstanding has remained virtually unchanged in the last five years, at 3.18 billion, probably as its largest shareholder, the Norwegian government who owns 71% of them, prefers to avoid diluting its stake considering how important the company’s contribution is to national coffers. To put this into perspective, Statoil’s 12-month trailing revenue of $110 billion is the equivalent of 41.5% of Norway’s GDP of $265 billion, according to the IMF’s most recent figures. With such a small float (29%) owned by shareholders other than the government, even a small increase in demand for the stock, such as what would happen once it’s clear that Europe will sort out its current troubles, could drive up the share price pretty quickly. And while at $80 billion in market cap the company’s valuation might seem too high to move to the upside too quickly, at $25 (today’s close) the stock is trading 40% below its pre-Lehman high of $41.68, reached in May of 2008. And yet when the company reports earnings next month February 9th, if the consensus estimate is somewhat close to the reported number, Statoil is expected to have earned $2.67 per share, above the $2.63 earned in fiscal year 2007, right before the financial crisis brought the world economy to a halt. The company’s return on equity, currently at 26.23% is also almost back to the pre-recession level of 28%.

Statoil’s $20.35 billion on total debt, or $3.3 billion in net debt when cash on hand is subtracted, accounts for only one third of its total capital, giving the company ample room to increase its dividend payout which at current levels translates into a yield of 3.9%. And with interest rates at rock-bottom levels and the company’s excellent return on equity and return on invested capital (52.4%) it would be silly not to continue funding exploration and production projects with additional debt. It would also be silly for investors to assume Statoil is simply another European stock to avoid.

Readers that are not yet MarketGrader.com subscribers may view our complete analysis of Statoil by clicking here or by visiting this week’s featured Honor Roll: Large Caps.

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By the Numbers

Will Apache’s Bets Pay Off?

No Comments 23 June 2011

If there is a company that seems to have leveraged itself for permanently higher oil prices, Apache is it. The company went on an acquisition spree last year (biggest in its history), with $11 billion in transactions in 2010. It also picked up its exploration pace, apparently expecting oil prices to stay elevated for years to come. Altogether it invested a total of $15.79 billion on exploration, development and acquisitions last year.

The company was in the news last week when it announced five new discoveries in its Egyptian fields, acquired from BP along with other assets for $7 billion, bringing this year’s total to eight discoveries in Egypt alone. It has stated that current Egyptian production stands at 215,000 barrels of oil and 900 million of cubic feet of gas per day. While many skeptics question Apache’s deep dive into a country undergoing a tectonic political shift not seen in 30 years, APA bulls would argue that what Egypt needs, if it is to satisfy its growing population’s hunger for higher living standards, is higher economic growth. In a Middle Eastern country famous for having very limited oil reserves in an oil rich neighborhood, oil and gas might be precisely the best place to start. As such, Egyptians may need Western oil companies as much as the companies need access to the country’s promising fields. Nevertheless, the purpose of this article isn’t to argue the political risks of investing in Egypt but rather the cost of Apache’s bet and whether it might be in a good position to capitalize on growing global demand for oil and higher crude prices.

With a market capitalization of $45 billion, Apache is no slouch. The company has been smartly run for years and, while suffering from a significant revenue and earnings decline in 2008, it had revenues of $13.37 billion during the last 12 months and net income of $3.46 billion, increasing by 20.2% and 3.6% respectively compared to the equivalent period three years before. While it has enough size to finance relatively large acquisitions, doing so while staying profitable is another story. So, how has the company financed its aggressive growth plans?

In the last 12 months Apache issued 17% more common shares than it had a year ago. The cost to existing shareholders has been significant. While the company reported fully diluted EPS of $2.81 in April for the quarter ended March 31st, the number would have been $3.29 had it maintained its shares at the same level as Q1 2010. We understand, of course, that in a growth environment share counts seldom remain steady; however, a 17% dilution affects shareholders’ bottom line directly. In other words, those owning the company’s shares prior to the beginning of the ongoing expansion paid $0.48 per share in the last year to pay for future growth; this before accounting for the company’s increase in debt. In contrast, during the prior three years, from Q1 2007 to Q1 2010 Apache increased its common share count only by 1.7%, enough perhaps to maintain a regular stock-based compensation plan in place.

The company also increased its debt in the last year at a higher pace than it had in previous years. Its long-term debt increased by 64% from quarter to quarter, with virtually all debt coming due beyond one year. Total debt stood at $8.16 billion at the end of last quarter, with only $30 million in short term debt. Despite this increase the company’s total debt still accounts for less than a quarter of its total capital (24.5% to be exact). Considering how cheap credit has been in the last two years and the opportunities the company has had to acquire assets at reasonable prices, this seems like a sound strategy. Based on fiscal year 2010 financial statements, Apache’s effective interest rate last year was approximately 2.6%. If it can borrow at this rate and produce 14.23% return on equity and 19.06% return on invested capital (both based on trailing 12-month figures), management could do worse than pursue current opportunities. Based on MarketGrader’s Economic Value indicator, part of our Cash Flow analysis, Apache’s combined after-tax cost of capital was 7.3% during this same period. The company could be hardly faulted for diluting shareholders and increasing its debt load, particularly given its history of strong financial results and the fact that BP needed to sell assets in a hurry. Now it needs to execute.

What could go wrong?

While Apache’s financials are strong and the company is growing profitably while expanding its margins, the strains of the added expenditures and debt do show in a few of our indicators. Our overall grade is currently 73.7 (out of 100). For those unfamiliar with MarketGrader’s research methodology please refer to this page or watch a brief video describing some of the tools on our web site. Essentially we grade companies’ financial statements from four perspectives: Growth, Value, Profitability and Cash Flow. Each category is comprised of 24 fundamental indicators, all of which are summed up in a final numerical grade. Apache’s 73.7 ranks it 7th among 254 companies followed by MarketGrader in the Oil & Gas Exploration & Production industry. In addition to the numbers highlighted before it should be noted that the company’s margins have remained very healthy during the last 12 months and seem to be expanding. Trailing 12-month operating margins were a remarkable 47.5% compared to 43.6% for the equivalent period ended a year earlier. As mentioned before its growth indicators are mostly positive and its value indicators make a strong case for investing at these levels. At current prices the shares are trading at 9.5 times the fiscal year 2011 consensus estimate. Where the company is weakest, understandably given its rising level of capital expenditures, is in its cash flow indicators. Despite generating $1.98 billion in cash flow last quarter, the company’s trailing 12-month free cash flow has been a negative $5.69 billion. Its capital expenditures over this same period were $12.99 billion. Apache does pay a dividend of $0.15 per share, which translates into a yield of 0.5%. It has sustained the same payout since 2006 and, at the current rate, its dividends account for only 3% of cash flow and 7% of earnings; so, despite its need for capital to expand, the dividend seems quite safe.

In conclusion, Apache seems to us like a good way to play elevated oil prices; not necessarily at $120 a barrel levels but within the current $80-$90 a barrel range. We say this not only because oil producers are more sensitive to oil prices than integrated companies or refiners but also because of the company’s history of well managed growth. Investors will be well served to monitor ongoing cash outlays and further shareholder dilution. So far the stock has held up reasonably well amid recent weakness among energy shares; a good way to monitor deterioration in investor sentiment is with our Sentiment indicator, which gauges non-fundamental factors affecting the company’s shares. Its current Sentiment indicator is ‘Positive’ based on a score of 8.4 (out of 10). You may read more about our Sentiment score here. Investors buying here, with expectations of continued global growth, even at a reduced rate, will be paying a good price for a well managed company striving to become a leader in its field.

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