The stock of Continental Resources (NYSE:CLR, 30-year Financials) is believed to be modestly 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 $27.08 per share and the market cap of $10 billion, Continental Resources stock is estimated to be modestly overvalued. GF Value for Continental Resources is shown in the chart below.
Because Continental Resources is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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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. Continental Resources has a cash-to-debt ratio of 0.01, which is in the bottom 10% of the companies in Oil & Gas industry. The overall financial strength of Continental Resources is 3 out of 10, which indicates that the financial strength of Continental Resources is poor. This is the debt and cash of Continental Resources 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. Continental Resources has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $2.6 billion and loss of $1.65 a share. Its operating margin is -10.66%, which ranks worse than 68% of the companies in Oil & Gas industry. Overall, the profitability of Continental Resources is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Continental 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 Continental Resources is -5%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -12.7%, which ranks worse than 66% of the companies in Oil & Gas industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Continental Resources's ROIC was -1.51, while its WACC came in at 16.62. The historical ROIC vs WACC comparison of Continental Resources is shown below:
To conclude, the stock of Continental Resources (NYSE:CLR, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 66% of the companies in Oil & Gas industry. To learn more about Continental Resources stock, you can check out its 30-year Financials here.
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