With a daily gain of 2.09%, a 3-month gain of 12.58%, and an Earnings Per Share (EPS) of 3.97, Coterra Energy Inc (CTRA, Financial) presents an interesting case for value investors. The question that arises is whether the stock is significantly undervalued. This article provides an in-depth valuation analysis of Coterra Energy, encouraging readers to delve further into the company's financials and market performance.
Coterra Energy is an independent exploration and production company with operations in Appalachia, the Permian Basin, and Oklahoma. Formed after the 2021 merger with Cabot and Cimarex, Coterra Energy's proved reserves were 2.4 billion barrels of oil equivalent by the end of 2022. The company's net production that year was approximately 633 million barrels of oil equivalent per day, of which 74% was natural gas.
At a stock price of $26.6 and a GF Value of $39.63, Coterra Energy appears to be significantly undervalued. This initial comparison sets the stage for a deeper exploration of the company's intrinsic value, combining financial assessment with key company details.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price 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.
Given these factors, Coterra Energy's stock appears to be significantly undervalued. With the stock's current price of $26.6 per share, the long-term return is likely to be much higher than its business growth.
Financial Strength of Coterra Energy
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 understand its financial strength. Coterra Energy has a cash-to-debt ratio of 0.33, which ranks worse than 59.57% of 1034 companies in the Oil & Gas industry. The overall financial strength of Coterra Energy is 7 out of 10, which indicates that the financial strength of Coterra Energy is fair.
Profitability and Growth
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. Coterra Energy has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $7.80 billion and Earnings Per Share (EPS) of $3.97. Its operating margin of 51.8% is better than 91.77% of 984 companies in the Oil & Gas industry. Overall, GuruFocus ranks Coterra Energy's profitability as strong.
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 Coterra Energy is 31.8%, which ranks better than 84.57% of 862 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 38.4%, which ranks better than 76.24% of 829 companies in the Oil & Gas industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Coterra Energy's ROIC is 17.24 while its WACC came in at 6.2.
In conclusion, the stock of Coterra Energy (CTRA, Financial) appears to be significantly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 76.24% of 829 companies in the Oil & Gas industry. To learn more about Coterra Energy stock, you can check out its 30-Year Financials here.
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