The stock of NGL Energy Partners LP (NYSE:NGL, 30-year Financials) appears to be 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 $2.06 per share and the market cap of $266.1 million, NGL Energy Partners LP stock gives every indication of being possible value trap. GF Value for NGL Energy Partners LP is shown in the chart below.
The reason we think that NGL Energy Partners LP stock might be a value trap is because NGL Energy Partners LP has an Altman Z-score of 0.70, 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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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 to understand its financial strength. NGL Energy Partners LP has a cash-to-debt ratio of 0.00, which which ranks in the bottom 10% of the companies in Oil & Gas industry. The overall financial strength of NGL Energy Partners LP is 3 out of 10, which indicates that the financial strength of NGL Energy Partners LP is poor. This is the debt and cash of NGL Energy Partners LP over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. NGL Energy Partners LP has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $5.2 billion and loss of $5.81 a share. Its operating margin is 3.22%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, the profitability of NGL Energy Partners LP is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of NGL Energy Partners LP 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 NGL Energy Partners LP is -19.4%, which ranks worse than 81% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is -17.9%, which ranks worse than 72% 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, NGL Energy Partners LP's ROIC is 2.87 while its WACC came in at 7.86. The historical ROIC vs WACC comparison of NGL Energy Partners LP is shown below:
Overall, NGL Energy Partners LP (NYSE:NGL, 30-year Financials) stock shows every sign of being possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 72% of the companies in Oil & Gas industry. To learn more about NGL Energy Partners LP stock, you can check out its 30-year Financials here.
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