Crescent Point Energy Stock Appears To Be Significantly Overvalued
- By GF Value
The stock of Crescent Point Energy (NYSE:CPG, 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 $4.8 per share and the market cap of $2.8 billion, Crescent Point Energy stock shows every sign of being significantly overvalued. GF Value for Crescent Point Energy is shown in the chart below.
Because Crescent Point Energy 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.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Crescent Point Energy has a cash-to-debt ratio of 0.01, which is in the bottom 10% of the companies in Oil & Gas industry. GuruFocus ranks the overall financial strength of Crescent Point Energy at 2 out of 10, which indicates that the financial strength of Crescent Point Energy is poor. This is the debt and cash of Crescent Point Energy over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Crescent Point Energy has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $1.2 billion and loss of $0.237 a share. Its operating margin of -216.70% in the bottom 10% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Crescent Point Energy's profitability as poor. This is the revenue and net income of Crescent Point Energy over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Crescent Point Energy is -18.8%, which ranks worse than 78% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -12.6%, which ranks worse than 66% of the companies in Oil & Gas industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Crescent Point Energy's ROIC was -45.58, while its WACC came in at 13.62. The historical ROIC vs WACC comparison of Crescent Point Energy is shown below:
Overall, the stock of Crescent Point Energy (NYSE:CPG, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 66% of the companies in Oil & Gas industry. To learn more about Crescent Point Energy 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.
