The stock of Comstock Resources (NYSE:CRK, 30-year Financials) is believed to be 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 $6.6 per share and the market cap of $1.5 billion, Comstock Resources stock gives every indication of being significantly overvalued. GF Value for Comstock Resources is shown in the chart below.
Because Comstock Resources is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Comstock Resources has a cash-to-debt ratio of 0.03, which ranks in the bottom 10% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Comstock Resources’s financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Comstock Resources 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. Comstock Resources has been profitable 2 years over the past 10 years. During the past 12 months, the company had revenues of $972.8 million and loss of $1.16 a share. Its operating margin of 28.64% better than 88% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Comstock Resources’s profitability as poor. This is the revenue and net income of Comstock 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Comstock Resources is -38.8%, which ranks in the bottom 10% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -34.1%, which ranks worse than 82% 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, Comstock Resources’s ROIC was 5.13, while its WACC came in at 9.23. The historical ROIC vs WACC comparison of Comstock Resources is shown below:
In conclusion, Comstock Resources (NYSE:CRK, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 82% of the companies in Oil & Gas industry. To learn more about Comstock Resources stock, you can check out its 30-year Financials here.
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