Devon Energy Corp (DVN, Financial) has experienced a daily gain of 3.58%, with a 3-month gain of 14.77%. The company also boasts an Earnings Per Share (EPS) (EPS) of 7.31. But is the stock fairly valued? This article aims to answer this question and provide a comprehensive valuation analysis of Devon Energy. Let's dive in.
Introduction to Devon Energy
Based in Oklahoma City, Devon Energy Corp is one of the largest independent exploration and production companies in North America. The company's assets are spread throughout onshore North America, including exposure to the Delaware, STACK, Eagle Ford, Powder River Basin, and Bakken plays. Devon Energy's proved reserves totaled 1.8 billion barrels of oil equivalent at the end of 2022, 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 stands at $52.92, while its GF Value, an estimation of fair value, is $53.43. This suggests that the stock might be fairly valued. Let's delve deeper into the company's value by examining its financial performance and business details.
Understanding GF Value
The GF Value is a unique measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
According to this method, Devon Energy's stock appears to be fairly valued. The GF Value Line suggests that if the stock price is significantly above the GF Value Line, the stock may be overvalued and its future returns might be poor. Conversely, if the stock price is significantly below the GF Value Line, the stock may be undervalued, and its future returns could be higher. Given Devon Energy's current stock price of $52.92 per share, the stock seems to be fairly valued.
As 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
Investing in companies with poor financial strength poses a higher risk of permanent capital loss. Therefore, it is crucial to carefully review a company's financial strength before deciding to buy its stock. A good starting point for understanding a company's financial strength is looking at its cash-to-debt ratio and interest coverage. Devon Energy's cash-to-debt ratio is 0.07, which is worse than 83.55% of 1021 companies in the Oil & Gas industry. Devon Energy's financial strength is ranked at 6 out of 10 by GuruFocus, indicating that its financial strength is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Higher profit margins usually indicate a better investment compared to a company with lower profit margins. Devon Energy has been profitable 5 out of the past 10 years. Over the past twelve months, the company had a revenue of $17 billion and an EPS of $7.31. Devon Energy's operating margin is 37.06%, which ranks better than 79.19% of 966 companies in the Oil & Gas industry. Overall, Devon Energy's profitability is ranked 6 out of 10, indicating fair profitability.
Growth is probably the most crucial factor in a company's valuation. 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. Devon Energy's 3-year average annual revenue growth is 23.7%, which ranks better than 76.85% of 851 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 56.9%, which ranks better than 86.37% of 822 companies in the Oil & Gas industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Devon Energy's ROIC is 24.3 while its WACC came in at 11.3.
Conclusion
Overall, Devon Energy's stock appears to be fairly valued. The company's financial condition is fair, and its profitability is fair. Its growth ranks better than 86.37% of 822 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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