The stock of Western Midstream Partners LP (NYSE:WES, 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 $21.35 per share and the market cap of $8.8 billion, Western Midstream Partners LP stock shows every sign of being significantly overvalued. GF Value for Western Midstream Partners LP is shown in the chart below.
Because Western Midstream Partners LP 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 1.55% 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. Western Midstream Partners LP 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 Western Midstream Partners LP is 3 out of 10, which indicates that the financial strength of Western Midstream Partners LP is poor. This is the debt and cash of Western Midstream Partners LP 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. Western Midstream Partners LP has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.7 billion and earnings of $2.21 a share. Its operating margin is 45.77%, which ranks better than 94% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Western Midstream Partners LP at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Western Midstream Partners LP over the past years:
Growth is probably one of the most important factors 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. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Western Midstream Partners LP’s 3-year average revenue growth rate is worse than 75% of the companies in Oil & Gas industry. Western Midstream Partners LP’s 3-year average EBITDA growth rate is -15%, which ranks worse than 70% 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, Western Midstream Partners LP’s return on invested capital is 10.58, and its cost of capital is 16.37. The historical ROIC vs WACC comparison of Western Midstream Partners LP is shown below:
Overall, the stock of Western Midstream Partners LP (NYSE:WES, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 70% of the companies in Oil & Gas industry. To learn more about Western Midstream Partners LP stock, you can check out its 30-year Financials here.
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