Fossil Fuel Exploration and Production company Devon Energy is taking Wall Street by surprise today, falling to $71.11 and marking a -8.0% change compared to the S&P 500, which moved -0.7%. DVN is -11.83% below its average analyst target price of $80.65, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Devon Energy shares have outstripped the S&P 500 by 101.4%, with a price change of 84.2%.
Devon Energy Corporation, an independent energy company, primarily engages in the exploration, development, and production of oil, natural gas, and natural gas liquids in the United States. The company is classified within the energy sector. 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. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.
Devon Energy's trailing 12 month P/E ratio is 9.0, based on its trailing Eps of $7.89. The company has a forward P/E ratio of 7.5 according to its forward Eps of $9.51 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2022, the energy sector has an average P/E ratio of 9.11, and the average for the S&P 500 is 15.97.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Devon Energy's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.22. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of Devon Energy's gross profit margin trends:
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 13,117,000,000.0 | 5,703,000,000.0 | 56.52 | 63.45 |
| 2020-12-31 | 4,503,000,000.0 | 2,946,000,000.0 | 34.58 | -13.4 |
| 2019-12-31 | 6,674,000,000.0 | 4,009,000,000.0 | 39.93 | 13.66 |
| 2018-12-31 | 8,439,000,000.0 | 5,474,000,000.0 | 35.13 | n/a |
- Average gross margin: 41.5 %
- Average gross margin growth rate: 21.2 %
- Coefficient of variability (lower numbers indicating more stability): 24.7 %
Devon Energy's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Devon Energy was $2,892,000,000.00 as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, DVN is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 457.1% and has on average been $937,000,000.00.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its 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. Devon energy's P/B ratio is 4.6 -- in other words, the market value of the company exceeds its book value by a factor of more than 4, 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 third quarter of 2022.
Devon Energy is likely fairly valued at today's prices because it has a very low P/E ratio, an elevated P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has strong growth indicators because of its strong margins, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into DVN's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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