Company ProfileÂ (excerpt from Reuters): Concho Resources Inc., incorporated on February 22, 2006, is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties. The Company’s four operating areas include the Northern Delaware Basin, the Southern Delaware Basin, the Midland Basin and the New Mexico Shelf. As of December 31, 2016, the Company’s operations were focused in the Permian Basin, which underlies an area of Southeast New Mexico and West Texas approximately 250 miles wide and 300 miles long. The Permian Basin is an oil and natural gas producing region in the United States and is characterized by multiple producing horizons and enhanced recovery potential. The majority of the rigs running in the Permian Basin are drilling horizontal wells. As of December 31, 2016, the Company produced approximately 55.1 million barrels of oil equivalent (MMBoe) of oil and natural gas.
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||$18,954,472,477||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.65||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||-119.89%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||136.72||Fail|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||1.94||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||0.65||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-6.08||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Fail|
|4. Dividend Record||Currently Pays Dividend||Fail|
|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||$13.49|
|MG Value based on 0% Growth||$7.91|
|Market Implied Growth Rate||64.11%|
|% of Intrinsic Value||N/A|
Concho Resources Inc 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 poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings stability or growth over the last five years, and the lack of dividends. 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 $3.94 in 2014 to an estimated $0.93 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 64.11% 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 Concho Resources Inc revealed the company was trading above its Graham Number of $63.4. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 136.72, which was above the industry average of 87.76. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-26.43.
Concho Resources Inc 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)||-$26.43|
|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||3/1/2018|
|Total Current Assets||$719,000,000|
|Total Current Liabilities||$1,109,000,000|
|Shares Outstanding (Diluted Average)||148,462,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$2.98|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$0.93|
Other ModernGraham posts about the company
|Most Overvalued Stocks of the S&P 500 â€“ March 2017|
|Concho Resources Inc Valuation â€“ Initial Coverage $CXO|
Other ModernGraham posts about related companies
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â See my current holdings here. Â This article is not investment advice; any reader should speak to aÂ registeredÂ investment adviser prior to making any investment decisions. Â ModernGraham is not affiliated with the company in any manner. Â Please be sure to review our detailed disclaimer.