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 Most Undervalued Companies for the Defensive Investor – November 2015. 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 Cabot Oil & Gas Corp (COG) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Cabot Oil & Gas Corporation is an independent oil and gas company engaged in the development, exploitation and exploration of oil and gas properties. The Company’s exploration, development and production operations are primarily concentrated in two plays: the Marcellus Shale in northeast Pennsylvania and the Eagle Ford Shale in south Texas. The Company’s Marcellus Shale properties are principally located in Susquehanna County and to a lesser extent Wyoming County, Pennsylvania. The Company’s properties in the Eagle Ford Shale are principally located in Atascosa, Frio and La Salle Counties, Texas. The Company also has operations in various other unconventional and conventional plays throughout the continental United States, including the Utica Shale in Pennsylvania; the Cotton Valley, Haynesville, Bossier, and James Lime formations in east Texas, and the Devonian Shale, Big Lime, Weir and Berea in West Virginia.
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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||$7,193,063,900||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.81||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||-55.16%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||80.74||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||3.45||Fail|
|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||0.81||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-40.21||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||-3.97%|
|MG Value based on 3% Growth||$3.18|
|MG Value based on 0% Growth||$1.86|
|Market Implied Growth Rate||36.12%|
|% of Intrinsic Value||14525.93%|
Cabot Oil & Gas Corp does not qualify for either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio, the insufficient earnings growth or stability over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns with the level of debt in relation to the current assets as well as the insufficient earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $0.30 in 2011 to an estimated $0.22 for 2015. This level of demonstrated earnings growth does not support the market’s implied estimate of 36.12% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the 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 Cabot Oil & Gas Corp (COG)? 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.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$7.61|
|Number of Consecutive Years of Dividend Growth||4|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||Sep15|
|Total Current Assets||$215,421,000|
|Total Current Liabilities||$265,585,000|
|Shares Outstanding (Diluted Average)||413,846,000|
Earnings Per Share History
|Next Fiscal Year Estimate||-$0.12|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.22|
Other ModernGraham posts about the company
|5 Speculative and Overvalued Companies to Avoid – December 2014|
|32 Companies in the Spotlight This Week – 12/6/14|
|Cabot Oil & Gas Corporation Annual Valuation – 2014 $COG|
Other ModernGraham posts about related companies
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.