The stock of Tellurian (NAS:TELL, 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 $4.335 per share and the market cap of $1.8 billion, Tellurian stock gives every indication of being possible value trap. GF Value for Tellurian is shown in the chart below.
The reason we think that Tellurian stock might be a value trap is because
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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. Tellurian has a cash-to-debt ratio of 3.12, which which ranks better than 72% of the companies in Oil & Gas industry. The overall financial strength of Tellurian is 6 out of 10, which indicates that the financial strength of Tellurian is fair. This is the debt and cash of Tellurian 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. Tellurian has been profitable 2 years over the past 10 years. During the past 12 months, the company had revenues of $37.9 million and loss of $0.71 a share. Its operating margin of -164.93% in the bottom 10% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Tellurian’s profitability as poor. This is the revenue and net income of Tellurian 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 Tellurian is 69%, which ranks better than 96% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is 37.9%, which ranks better than 85% of the companies in Oil & Gas industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Tellurian’s return on invested capital is -21.31, and its cost of capital is 17.21. The historical ROIC vs WACC comparison of Tellurian is shown below:
Overall, Tellurian (NAS:TELL, 30-year Financials) stock shows every sign of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 85% of the companies in Oil & Gas industry. To learn more about Tellurian stock, you can check out its 30-year Financials here.
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