SM Energy Co (SM, Financial) experienced a daily loss of -3.13%, but has shown a 3-month gain of 40.45%. With an Earnings Per Share (EPS) (EPS) of 8.83, the question arises: Is the stock modestly overvalued? This article aims to provide a comprehensive valuation analysis of SM Energy Co, encouraging readers to delve into the following sections for a deeper understanding.
Company Introduction
SM Energy Co is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids. Primarily operating in the United States, the company actively participates in joint ventures, prospects/leaseholds, and drill-to-earn opportunities. The majority of the company's revenue is derived from premier drilling locations in the United States. The company's stock price is currently at $40.33, while its GF Value, an estimation of fair value, stands at $32.64.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. It is calculated based on historical multiples, the GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance. We believe the GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
SM Energy Co's stock is estimated to be modestly overvalued based on GuruFocus' valuation method. The stock may be overvalued if the share price is significantly above the GF Value Line, indicating poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $40.33 per share, SM Energy Co stock is estimated to be modestly overvalued. As SM Energy Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
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. SM Energy Co has a cash-to-debt ratio of 0.24, which is worse than 65.1% of 1023 companies in the Oil & Gas industry. The overall financial strength of SM Energy Co is 6 out of 10, which indicates that the financial strength of SM Energy Co is fair.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. SM Energy Co has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $2.60 billion and EPS of $8.83. Its operating margin is 47.31%, which ranks better than 88.66% of 970 companies in the Oil & Gas industry. Overall, GuruFocus ranks the profitability of SM Energy Co at 6 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. 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 SM Energy Co is 24.2%, which ranks better than 76.79% of 853 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 36.7%, which ranks better than 75.03% of 821 companies in the Oil & Gas industry.
ROIC vs WACC
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, SM Energy Co's ROIC was 19.06, while its WACC came in at 18.27.
Conclusion
In short, the stock of SM Energy Co (SM, Financial) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 75.03% of 821 companies in the Oil & Gas industry. To learn more about SM Energy Co stock, you can check out its 30-Year Financials here.
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