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 5 Lowest PEmg Companies for Enterprising Investors. 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 EOG Resources Inc. (EOG) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): EOG Resources, Inc.(EOG) explores , develops, produces and markets crude oil and natural gas primarily in producing basins in the United States of America , Canada, The Republic of Trinidad and Tobago (Trinidad), the United Kingdom , The People’s Republic of China (China), the Argentine Republic (Argentina) and, from time to time, select other international areas. As of December 31, 2012, EOG’s total estimated net proved reserves were 1,811 million barrels of oil equivalent, of which 701 million barrels were crude oil and condensate reserves, 320 million barrels were natural gas liquids (NGLs) reserves and 4,740 billion cubic feet, or 790 million barrels of oil equivalent, were natural gas. EOG’s operations are all crude oil and natural gas exploration and production related.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- 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 – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- 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 – PASS
|Value Based on 3% Growth||$43.07|
|Value Based on 0% Growth||$25.25|
|Market Implied Growth Rate||13.38%|
|Net Current Asset Value (NCAV)||-$20.65|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
EOG Resources is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns with the low current ratio, the lack of sufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is concerned with the high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach should explore other opportunities through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and ModernGraham’s valuation of Chevron (CVX). From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.84 in 2010 to only an estimated $2.97 for 2014. This level of demonstrated growth does not support the market’s implied estimate of 13.38% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.
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 EOG Resources Inc. (EOG)? 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.
Disclaimer: The author did not hold a position in EOG Resources Inc. (EOG) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.