The stock of Tellurian (NAS:TELL, 30-year Financials) shows every sign of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $2.49 per share and the market cap of $962.6 million, Tellurian stock appears to be possible value trap. GF Value for Tellurian is shown in the chart below.
The reason we think that Tellurian stock might be a value trap is because Tellurian has an Altman Z-score of -2.66, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Tellurian has a cash-to-debt ratio of 0.69, which ranks in the middle range of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Tellurian's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Tellurian over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Tellurian has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $37.4 million and loss of $0.81 a share. Its operating margin is -191.96%, which ranks in the bottom 10% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Tellurian at 2 out of 10, which indicates poor profitability. This is the revenue and net income of Tellurian over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Tellurian is 69%, which ranks better than 95% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is 37.9%, which ranks better than 84% of the companies in Oil & Gas industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Tellurian's ROIC is -21.99 while its WACC came in at 19.93. The historical ROIC vs WACC comparison of Tellurian is shown below:
To conclude, the stock of Tellurian (NAS:TELL, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 84% of the companies in Oil & Gas industry. To learn more about Tellurian stock, you can check out its 30-year Financials here.
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