DCP Midstream LP Stock Gives Every Indication Of Being Significantly Overvalued
- By GF Value
The stock of DCP Midstream LP (NYSE:DCP, 30-year Financials) shows every sign of being 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 $29.83 per share and the market cap of $6.2 billion, DCP Midstream LP stock appears to be significantly overvalued. GF Value for DCP Midstream LP is shown in the chart below.
Because DCP Midstream LP is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 5.22% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. DCP Midstream LP has a cash-to-debt ratio of 0.00, which ranks in the bottom 10% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks DCP Midstream LP's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of DCP Midstream LP 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. DCP Midstream LP has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $7 billion and earnings of $1.14 a share. Its operating margin of 1.59% in the middle range of the companies in Oil & Gas industry. Overall, GuruFocus ranks DCP Midstream LP's profitability as fair. This is the revenue and net income of DCP Midstream LP 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 DCP Midstream LP is -20%, which ranks worse than 80% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -34.1%, 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, DCP Midstream LP's return on invested capital is 0.88, and its cost of capital is 14.80. The historical ROIC vs WACC comparison of DCP Midstream LP is shown below:
Overall, DCP Midstream LP (NYSE:DCP, 30-year Financials) stock appears to be significantly overvalued. 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 DCP Midstream LP stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
