The stock of Cheniere Energy (AMEX:LNG, 30-year Financials) is believed to be fairly valued, 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 $74.19 per share and the market cap of $18.8 billion, Cheniere Energy stock is believed to be fairly valued. GF Value for Cheniere Energy is shown in the chart below.
Because Cheniere Energy is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 15.6% over the past three years and is estimated to grow 6.42% annually over the next three to five years.
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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. Cheniere Energy has a cash-to-debt ratio of 0.05, which is worse than 84% of the companies in Oil & Gas industry. GuruFocus ranks the overall financial strength of Cheniere Energy at 2 out of 10, which indicates that the financial strength of Cheniere Energy is poor. This is the debt and cash of Cheniere Energy over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Cheniere Energy has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $9.4 billion and loss of $0.4 a share. Its operating margin is 28.18%, which ranks better than 88% of the companies in Oil & Gas industry. Overall, the profitability of Cheniere Energy is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Cheniere Energy 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 Cheniere Energy is 15.6%, which ranks better than 81% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is 18.5%, which ranks better than 71% of the companies in Oil & Gas industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Cheniere Energy's return on invested capital is 7.29, and its cost of capital is 8.29. The historical ROIC vs WACC comparison of Cheniere Energy is shown below:
Overall, the stock of Cheniere Energy (AMEX:LNG, 30-year Financials) is estimated to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 71% of the companies in Oil & Gas industry. To learn more about Cheniere Energy stock, you can check out its 30-year Financials here.
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