Canadian Natural Resources Stock Is Believed To Be Modestly Overvalued
- By GF Value
The stock of Canadian Natural Resources (NYSE:CNQ, 30-year Financials) gives every indication of being modestly 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 $30.09 per share and the market cap of $35.8 billion, Canadian Natural Resources stock appears to be modestly overvalued. GF Value for Canadian Natural Resources is shown in the chart below.
Because Canadian Natural Resources is relatively overvalued, the long-term return of its stock is likely to be lower than its 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. Canadian Natural Resources has a cash-to-debt ratio of 0.02, which ranks in the bottom 10% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Canadian Natural Resources's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Canadian Natural Resources 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. Canadian Natural Resources has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $13.1 billion and loss of $0.209 a share. Its operating margin is -2.54%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Canadian Natural Resources at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Canadian Natural Resources 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. Canadian Natural Resources's 3-year average revenue growth rate is in the middle range of the companies in Oil & Gas industry%. Canadian Natural Resources's 3-year average EBITDA growth rate is -12.3%, which ranks worse than 69% 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, Canadian Natural Resources's ROIC was -0.30, while its WACC came in at 10.32. The historical ROIC vs WACC comparison of Canadian Natural Resources is shown below:
In closing, the stock of Canadian Natural Resources (NYSE:CNQ, 30-year Financials)is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 69% of the companies in Oil & Gas industry. To learn more about Canadian Natural Resources stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.
