QEP Resources recently spun-off as an individual company, causing it to be difficult for Intelligent Investors to analyze without engaging in speculation. Â The trouble with spin-offs is that they inherently require speculation regarding what the company’s earnings would have been had it been on its own before the spin-off, and Benjamin Graham taught that speculating is one of the biggest things to avoid when conducting an analysis of a given company. Â Intelligent Investors must stick to their investment techniques and look primarily at the fundamentals and actual results the company achieves. Â AÂ company must have strong financial statements to prove that it is stable enough for Intelligent Investors. Â This isÂ 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. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how QEP Resources fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â QEP Resources, Inc. (QEP) is a holding company. The Company operates in three lines of business: gas and oil exploration and production, midstream field services, and energy marketing. It conducted through three principal subsidiaries: QEP Energy Company (QEP Energy) acquires, explores for, develops and produces natural gas, oil, and natural gas liquids (NGL); QEP Field Services Company (QEP Field Services) provides midstream field services, including natural gas gathering, processing, compression and treating services for affiliates and third parties; andQEP Marketing Company (QEP Marketing) markets affiliate and third-party natural gas and oil, provides risk-management services, and owns and operates an underground gas-storage reservoir. Effective October 21, 2013, JANA Partners LLC acquired a 7.5% stake in QEP Resources Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – FAIL
|Value Based on 3% Growth||$17.58|
|Value Based on 0% Growth||$10.31|
|Market Implied Growth Rate||8.43%|
|Net Current Asset Value (NCAV)||-$29.81|
Balance Sheet – 9/30/2013
Earnings Per Share
|2009 ** prior to spin-off||$1.21|
|2008 ** prior to spin-off||$2.90|
|2007 ** prior to spin-off||$2.05|
|2006 ** prior to spin-off||$1.74|
Earnings Per Share – ModernGrahamÂ
QEP Resources does not qualify for either the Defensive Investor or the Enterprising Investor because it does not have a long enough history as an individual company. Â Without at least five years of operating history on its own, investors are left to speculate about how the company would have performed prior to its spin-off. Â As a result, investors should take note of the company and analyze it as much as possible, but keep it on a watch list until there is further information. Â In the meantime,Â value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities, such as through a review ofÂ companies that pass the ModernGraham requirements. Â From a valuation perspective, even though there is not enough information to generate a solid estimate for growth, speculators will note that based on the current EPSmg (normalized earnings), and a growth rate of 3%, the company would only be worth $17.58 under the ModernGraham valuation model.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on QEP Resources (QEP)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in QEP Resources (QEP) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the company website; this article is not affiliated with the company in any manner.