One of Wall Street's biggest winners of the day is APA, a fossil fuel exploration and production company whose shares have climbed 8.1% to a price of $36.97. The average analyst rating for the stock is buy, and it's trading 32.26% below its average analyst target price of $54.58. APA outperformed the S&P 500 index by 5.8% during today's afternoon session, and by 71.6% over the last year with a return of 55.0%.
APA Corporation, through its subsidiaries, explores for, develops, and produces oil and gas properties. The company is classified within the energy sector, which encompasses the oil, gas, nuclear, and renewable energy industries. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -- meaning large and frequent price swings.
APA's trailing 12 month P/E ratio is 4.2, based on its trailing Eps of $8.88. The company has a forward P/E ratio of 3.4 according to its forward Eps of $11.02 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US energy companies is 9.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The problem with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has extremely high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide APA's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.1. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are under valuing APA's growth potential .
To gauge the health of APA's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof. APA's average gross profit margins over the last four years are 68.1%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -5%.
APA's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
- 2021 free cash flow: $2,383,000,000.00
- 2020 free cash flow: $86,000,000.00
- 2019 free cash flow: $-94,000,000.00
- 2018 free cash flow: $-127,000,000.00
- Average free cash flow: $562,000,000.00
- Average free cash flown growth rate: 962.8 %
- Coefficient of variability (lower numbers indicating more stability): 216.7 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in APA have received an annualized dividend yield of 1.3% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
APA's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 21, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.45 as of the second quarter of 2022.
With a very low P/E ratio, an elevated P/B ratio, and improving cash flows, we can conclude that APA is probably under valued at current prices. The stock presents mixed growth indicators because it has a PEG ratio of less than 1, but shrinking gross margins. Thanks for dropping by! If you liked this article, please subscribe to our newsletter -- it's free and delivered daily!