EQT Stock Is Believed To Be Significantly Overvalued

GuruFocus.com
·3 min read

- By GF Value

The stock of EQT (NYSE:EQT, 30-year Financials) appears to be significantly overvalued, 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 $20.14 per share and the market cap of $5.6 billion, EQT stock gives every indication of being significantly overvalued. GF Value for EQT is shown in the chart below.


EQT Stock Is Believed To Be Significantly Overvalued
EQT Stock Is Believed To Be Significantly Overvalued

Because EQT is significantly overvalued, the long-term return of its stock is likely to be much lower than its future 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. EQT 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 EQT is 3 out of 10, which indicates that the financial strength of EQT is poor. This is the debt and cash of EQT over the past years:

EQT Stock Is Believed To Be Significantly Overvalued
EQT Stock Is Believed To Be Significantly Overvalued

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. EQT has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $3.1 billion and loss of $3.3 a share. Its operating margin is -14.35%, which ranks worse than 70% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of EQT at 5 out of 10, which indicates fair profitability. This is the revenue and net income of EQT over the past years:

EQT Stock Is Believed To Be Significantly Overvalued
EQT Stock Is Believed To Be Significantly Overvalued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of EQT is -10.8%, which ranks worse than 66% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is -40.5%, which ranks worse than 86% 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, EQT's return on invested capital is -1.78, and its cost of capital is 7.03. The historical ROIC vs WACC comparison of EQT is shown below:

EQT Stock Is Believed To Be Significantly Overvalued
EQT Stock Is Believed To Be Significantly Overvalued

In conclusion, the stock of EQT (NYSE:EQT, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 86% of the companies in Oil & Gas industry. To learn more about EQT 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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