Pembina Pipeline Stock Is Believed To Be Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of Pembina Pipeline (NYSE:PBA, 30-year Financials) is believed to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $28.87 per share and the market cap of $15.8 billion, Pembina Pipeline stock shows every sign of being fairly valued. GF Value for Pembina Pipeline is shown in the chart below.


Pembina Pipeline Stock Is Believed To Be Fairly Valued
Pembina Pipeline Stock Is Believed To Be Fairly Valued

Because Pembina Pipeline is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.

Link: These companies may deliever higher future returns at reduced risk.

It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Pembina Pipeline has a cash-to-debt ratio of 0.01, which is in the bottom 10% of the companies in Oil & Gas industry. The overall financial strength of Pembina Pipeline is 4 out of 10, which indicates that the financial strength of Pembina Pipeline is poor. This is the debt and cash of Pembina Pipeline over the past years:

Pembina Pipeline Stock Is Believed To Be Fairly Valued
Pembina Pipeline Stock Is Believed To Be Fairly Valued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Pembina Pipeline has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $4.6 billion and loss of $0.725 a share. Its operating margin is 28.70%, which ranks better than 89% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Pembina Pipeline at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Pembina Pipeline over the past years:

Pembina Pipeline Stock Is Believed To Be Fairly Valued
Pembina Pipeline Stock Is Believed To Be Fairly Valued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Pembina Pipeline's 3-year average revenue growth rate is in the middle range of the companies in Oil & Gas industry%. Pembina Pipeline's 3-year average EBITDA growth rate is -29.8%, which ranks worse than 82% of the companies in Oil & Gas industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Pembina Pipeline's return on invested capital is 4.12, and its cost of capital is 8.71. The historical ROIC vs WACC comparison of Pembina Pipeline is shown below:

Pembina Pipeline Stock Is Believed To Be Fairly Valued
Pembina Pipeline Stock Is Believed To Be Fairly Valued

In summary, Pembina Pipeline (NYSE:PBA, 30-year Financials) stock is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 82% of the companies in Oil & Gas industry. To learn more about Pembina Pipeline stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.

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