The stock of OGE Energy (NYSE:OGE, 30-year Financials) gives every indication of being possible value trap, 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 $34.33 per share and the market cap of $6.9 billion, OGE Energy stock gives every indication of being possible value trap. GF Value for OGE Energy is shown in the chart below.
The reason we think that OGE Energy stock might be a value trap is because OGE Energy has an Altman Z-score of 1.13, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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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. OGE Energy has a cash-to-debt ratio of 0.00, which is in the bottom 10% of the companies in the industry of Utilities - Regulated. GuruFocus ranks the overall financial strength of OGE Energy at 3 out of 10, which indicates that the financial strength of OGE Energy is poor. This is the debt and cash of OGE 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. OGE Energy has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $3.3 billion and earnings of $1.85 a share. Its operating margin of 15.49% in the middle range of the companies in the industry of Utilities - Regulated. Overall, GuruFocus ranks OGE Energy's profitability as fair. This is the revenue and net income of OGE Energy over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of OGE Energy is -2.1%, which ranks worse than 72% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth is -37.1%, which ranks in the bottom 10% of the companies in the industry of Utilities - Regulated.
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, OGE Energy's ROIC is 3.61 while its WACC came in at 5.04. The historical ROIC vs WACC comparison of OGE Energy is shown below:
In summary, The stock of OGE Energy (NYSE:OGE, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in the industry of Utilities - Regulated. To learn more about OGE Energy stock, you can check out its 30-year Financials here.
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