Devon Energy Corp (DVN, Financial) saw a daily gain of 2.57%, with a 3-month gain of 12.43%. With an Earnings Per Share (EPS) of 7.31, the question arises: is the stock fairly valued? This article aims to provide a detailed analysis of Devon Energy's valuation. We encourage you to read on for a comprehensive evaluation.
Company Introduction
Devon Energy, based in Oklahoma City, is one of the largest independent exploration and production companies in North America. The firm's asset base is spread throughout onshore North America and includes exposure to the Delaware, STACK, Eagle Ford, Powder River Basin, and Bakken plays. As of 2022, Devon's proved reserves totaled 1.8 billion barrels of oil equivalent, and its net production was 611 thousand boe/d, with oil and natural gas liquids making up 73% of production, and natural gas accounting for the remainder.
Currently, Devon Energy's stock price is $52.41, with a market cap of $33.60 billion. To facilitate a deeper understanding of the company's value, we'll compare the stock price with the GF Value, an estimation of fair value. This approach will pave the way for a profound exploration of the company's value, ingeniously integrating financial assessment with essential company details.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally trade at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) at which the stock has traded.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value at which the stock should be traded. The stock price will most likely fluctuate around the GF Value Line. If the stock price 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.
Devon Energy (DVN, Financial) appears 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, 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 $52.41 per share and the market cap of $33.60 billion, Devon Energy stock shows every sign of being fairly valued.
Because Devon Energy is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Devon Energy has a cash-to-debt ratio of 0.07, which ranks worse than 83.37% of 1022 companies in the Oil & Gas industry. The overall financial strength of Devon Energy is 6 out of 10, which indicates that the financial strength of Devon Energy is fair.
Profitability and Growth
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. Devon Energy has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $17 billion and Earnings Per Share (EPS) of $7.31. Its operating margin is 37.06%, which ranks better than 79.32% of 967 companies in the Oil & Gas industry. Overall, GuruFocus ranks the profitability of Devon Energy at 6 out of 10, which indicates fair profitability.
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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Devon Energy is 23.7%, which ranks better than 76.29% of 852 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 56.9%, which ranks better than 86.42% of 825 companies in the Oil & Gas industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of 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, Devon Energy's return on invested capital is 24.3, and its cost of capital is 11.2.
Conclusion
In conclusion, the stock of Devon Energy (DVN, Financial) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 86.42% of 825 companies in the Oil & Gas industry. To learn more about Devon Energy stock, you can check out its 30-Year Financials here.
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