– By GF value
The stock of Canadian Natural Resources (NYSE: CNQ, 30-year-old Financials) gives all indications of being significantly overvalued, according to the GuruFocus value calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, past business growth, and analysts’ estimates of future business performance. If a share’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 37.6 per share and market cap of $ 44.4 billion, shares of Canadian Natural Resources are estimated to be significantly overvalued. The GF value for Canadian natural resources is shown in the table below.
Given that Canadian Natural Resources is significantly overvalued, the long-term performance of its stocks will likely be much lower than the future growth of its business, which is expected to grow 2.01% per year 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 shares. Investing in companies with low financial strength presents a higher risk of permanent loss. Examining the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a business. Canadian Natural Resources has a cash-to-debt ratio of 0.03, which is worse than 89% of companies in the oil and gas industry. The overall financial strength of Canadian Natural Resources is 4 out of 10, indicating that the financial strength of Canadian Natural Resources is low. Here is the debt and cash flow of Canadian Natural Resources over the past few years:
It is less risky to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A business with high profit margins is also generally a safer investment than a business with low profit margins. Canadian Natural Resources has been profitable 7 in the past 10 years. In the past twelve months, the company reported sales of $ 15.4 billion and earnings of $ 1.487 per share. Its operating margin is 6.55%, which ranks better than 66% of companies in the oil and gas industry. Overall, GuruFocus ranks the profitability of Canadian Natural Resources at 6 out of 10, indicating fair profitability. Here are the revenues and net income of Canadian Natural Resources for the past few years:
Growth is probably the most important factor in the valuation of a business. GuruFocus research has shown that growth is closely tied to the long-term performance of a company’s stocks. The faster a company grows, the more likely it is to create shareholder value, especially if the growth is profitable. Canadian Natural Resources’ three-year average annual revenue growth rate is -1.6%, which is within the average for companies in the oil and gas industry. The 3-year average EBITDA growth rate is -11.9%, which ranks among the average for companies in the oil and gas industry.
One can also assess 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 the extent to which a business 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 should 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 to create value for its shareholders. Over the past 12 months, Canadian Natural Resources’ ROIC is 1.75 while its WACC stood at 11.73. The historical comparison of ROIC vs WACC of Canadian natural resources is shown below:
In conclusion, the stock of Canadian natural resources (NYSE: CNQ, 30-year Financials) is estimated to be significantly overvalued. The company’s financial situation is bad and its profitability is fair. Its growth is in the mid-range of companies in the oil and gas industry. To learn more about Canadian Natural Resources stocks, you can view its 30-year financial data here.
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This article first appeared on GuruFocus.