OneOK Inc. (OKE) Annual Valuation

500px-ONEOK_Logo_.svgWhen a company has seen a lengthy rise in price, some investors have a tendency to believe that it must be a good investment because it keeps going up.  However, this is a common way of engaging in rampant speculation, and as Benjamin Graham taught, speculating has only a very limited role in investing.  Intelligent Investors know to 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.  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 specific look at how OneOK Inc. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): ONEOK, Inc. is a diversified energy company. The Company’s segments include ONEOK Partners, Natural Gas Distribution and Energy Services. As of December 31, 2012, the Company was the sole general partner and own 43.4 % of ONEOK Partners, L.P. ONEOK Partners is engaged in the gathering, processing, storage and transportation of natural gas in the United States. In addition, ONEOK Partners owns natural gas liquids systems, connecting natural gas liquids (NGL) supply in the Mid-Continent and Rocky Mountain regions with key market centers. The Company’s distribution markets include Oklahoma City and Tulsa, Oklahoma; Kansas City, Wichita, and Topeka, Kansas, and Austin and El Paso, Texas. Its energy services operation is engaged in providing natural gas marketing services to its customers across the United States. In February 2014, it has completed its separation of its natural gas distribution business into ONE Gas, Inc.

OKE Chart

OKE data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. 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
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $59.62
MG Value $21.46
MG Opinion Overvalued
Value Based on 3% Growth $24.18
Value Based on 0% Growth $14.17
Market Implied Growth Rate 13.63%
NCAV -$60.79
PEmg 35.76
Current Ratio 1.10
PB Ratio 5.62

Balance Sheet – 9/30/2013

Current Assets $2,882,000,000
Current Liabilities $2,621,700,000
Total Debt $7,757,200,000
Total Assets $17,610,300,000
Intangible Assets $990,500,000
Total Liabilities $15,420,600,000
Outstanding Shares 206,270,000

Earnings Per Share

2013 $1.78
2012 $1.64
2011 $1.67
2010 $1.55
2009 $1.44
2008 $1.47
2007 $1.40
2006 $1.34
2005 $1.87
2004 $1.15
2003 $1.07

Earnings Per Share – ModernGraham 

2013 $1.67
2012 $1.59
2011 $1.55
2010 $1.47
2009 $1.46
2008 $1.46

Dividend History

OKE Dividend Chart

OKE Dividend data by YCharts

Conclusion:

OneOK is not suitable for either the Defensive Investor or the Enterprising Investor.  For the Defensive Investor, the company fails the requirements for current ratio, earnings growth over the ten year historical period, PEmg ratio and PB ratio.  For the Enterprising Investor, the company has too much debt relative to its current assets.  As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should research other opportunities, such as through a review of 5 Low PE Companies for the Defensive Investor or 5 Undervalued Companies for the Enterprising Investor.  As for a valuation, the company has only grown its EPSmg (normalized earnings) from $1.46 in 2008 to $1.67 for 2013.  This low level of demonstrated historical growth does not support the market’s implied estimate for earnings growth of 13.63%, and the ModernGraham valuation model returns an estimate of intrinsic value that is below the market price, indicating the company is currently overvalued.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on OneOK Inc. (OKE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in OneOK Inc. (OKE) 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 Wikipedia; this article is not affiliated with the company in any manner.


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