The stock of Canadian Natural Resources (NYSE:CNQ, 30-year Financials) gives every indication 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 $37.6 per share and the market cap of $44.4 billion, Canadian Natural Resources stock is estimated to be significantly overvalued. GF Value for Canadian Natural Resources is shown in the chart below.
Because Canadian Natural Resources 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 2.01% annually over the next three to five years.
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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. Canadian Natural Resources has a cash-to-debt ratio of 0.03, which is worse than 89% of the companies in Oil & Gas industry. The overall financial strength of Canadian Natural Resources is 4 out of 10, which indicates that the financial strength of Canadian Natural Resources is poor. This is the debt and cash of Canadian Natural Resources over the past years:
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. Canadian Natural Resources has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $15.4 billion and earnings of $1.487 a share. Its operating margin is 6.55%, which ranks better than 66% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Canadian Natural Resources at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Canadian Natural Resources 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 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 Canadian Natural Resources is -1.6%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -11.9%, which ranks in the middle range of the companies in 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, Canadian Natural Resources's ROIC is 1.75 while its WACC came in at 11.73. The historical ROIC vs WACC comparison of Canadian Natural Resources is shown below:
In conclusion, The stock of Canadian Natural Resources (NYSE:CNQ, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Canadian Natural Resources stock, you can check out its 30-year Financials here.
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