Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Undervalued Stocks for the Enterprising Investor – August 2017. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Pioneer Natural Resources (PXD) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Pioneer Natural Resources Company is an oil and gas exploration and production company. The Company explores for, develops and produces oil, natural gas liquids (NGLs) and gas within the United States, with operations primarily in the Permian Basin in West Texas, the Eagle Ford Shale play in South Texas, the Raton field in southeast Colorado and the West Panhandle field in the Texas Panhandle. As of December 31, 2016, the Company owned interests in eight gas processing plants and nine treating facilities. As of December 31, 2016, its Spraberry/Wolfcamp field covered approximately 800,000 gross acres (690,000 net acres). The Company completed 12 Eagle Ford Shale wells during the fiscal year ended December 31, 2016. As of December 31, 2016, the Company owned approximately 185,000 gross acres (165,000 net acres) in the center of the Raton Basin. As of December 31, 2016, the Company’s gas had an average energy content of 1,400 British thermal unit (Btu).
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$22,304,888,628||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||1.97||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-137.93%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||1,311.30||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.10||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||1.97||Pass|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||1.51||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Fail|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||-4.25%|
|MG Value based on 3% Growth||$1.45|
|MG Value based on 0% Growth||$0.85|
|Market Implied Growth Rate||651.40%|
|% of Intrinsic Value||N/A|
Pioneer Natural Resources does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.37 in 2013 to an estimated $0.1 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 651.4% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Pioneer Natural Resources revealed the company was trading above its Graham Number of $61.59. The company pays a dividend of $0.08 per share, for a yield of 0.1% Its PEmg (price over earnings per share – ModernGraham) was 1311.3, which was above the industry average of 63.11. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-15.35.
Pioneer Natural Resources scores quite poorly in the ModernGraham grading system, with an overall grade of F.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$15.35|
|Number of Consecutive Years of Dividend Growth||0|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||6/1/2017|
|Total Current Assets||$3,064,000,000|
|Total Current Liabilities||$1,558,000,000|
|Shares Outstanding (Diluted Average)||170,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.75|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.10|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.