Williams Companies Shares Are Climbing Today - Are They Overvalued?

Shares of Williams Companies (WMB) jumped 0.1 % during today's afternoon session, bringing their 52 week performance to 6.0%. The stock seems to be overvalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.

The Williams Companies, Inc., together with its subsidiaries, operates as an energy infrastructure company primarily in the United States. The large-cap Utilities company is based in Tulsa, United States and has 5,043 full time employees.

WMB's P/E Ratio Is Better Than the Sector Average

Compared to the Utilities sector's average of 22.89, Williams Companies has a trailing twelve month price to earnings (P/E) ratio of 15.3 and an expected P/E ratio of 19.3. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $2.28 and $1.81 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Williams Companies's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Williams Companies Is Overvalued in Terms of Expected Growth

Williams Companies's PEG ratio is 4.94. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Williams Companies's case, it tells us the company is overvalued.

WMB Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Williams Companies's P/B ratio of 3.6 is higher than its sector average of 1.03, such a margin of safety does not exist for the stock.

WMB's Weak Cash Flow Generation Is Troubling

The table below shows that Williams Companies is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Williams Companies's case, free cash flow is growing at an average rate of 105.6% with a coefficient of variability of 263.1%. We can also see that cash flows from operations are evolving at a 9.3% rate, versus -2.5%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023 5,600,000 2,802,000 2,798,000 6.15
2022 4,889,000 2,253,000 2,636,000 -2.59
2021 3,945,000 1,239,000 2,706,000 19.89
2020 3,496,000 1,239,000 2,257,000 42.49
2019 3,693,000 2,109,000 1,584,000 4181.08
2018 3,293,000 3,256,000 37,000

Williams Companies's Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Williams Companies's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Williams Companies's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023 11,515,000 7,393,000 36 28.57
2022 10,965,000 7,947,000 28 12.0
2021 10,627,000 7,996,000 25 -10.71
2020 7,719,000 5,517,000 28 21.74
2019 8,201,000 6,280,000 23 155.56
2018 8,686,000 7,918,000 9

Williams Companies's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023 11,515,000 7,393,000 36 28.57
2022 10,965,000 7,947,000 28 12.0
2021 10,627,000 7,996,000 25 -10.71
2020 7,719,000 5,517,000 28 21.74
2019 8,201,000 6,280,000 23 155.56
2018 8,686,000 7,918,000 9

Williams Companies's cost of revenue is growing at a rate of -1.1% in contrast to None% for operating expenses. Sales revenues, on the other hand, have experienced a 4.8% growth rate. As a result, the average gross margins growth is 25.9 and the average operating margins growth rate is 25.9, with coefficients of variability of 263.8% and 263.8% respectively.

We See Mixed Market Signals Regarding WMB

Williams Companies has an average rating of buy and target prices ranging from $42.0 to $31.0. At its current price of $34.91, the company is trading -7.26% away from its target price of $37.65. 2.1% of the company's shares are linked to short positions, and 87.5% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-06-30 Vanguard Group Inc 11% 128,606,314 $4,490,289,571
2023-06-30 Blackrock Inc. 10% 118,182,992 $4,126,359,273
2023-06-30 State Street Corporation 7% 82,587,296 $2,883,535,515
2023-06-30 Bank of America Corporation 4% 50,857,177 $1,775,678,381
2023-06-30 Dodge & Cox Inc 3% 39,014,106 $1,362,177,546
2023-06-30 Geode Capital Management, LLC 2% 27,149,522 $947,925,585
2023-06-30 JP Morgan Chase & Company 2% 23,881,035 $833,806,358
2023-06-30 ClearBridge Investments, LLC 2% 23,515,457 $821,042,202
2023-06-30 Royal Bank of Canada 2% 21,392,837 $746,930,923
2023-06-30 Price (T.Rowe) Associates Inc 2% 20,028,700 $699,302,078
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.