The stock of Canadian Natural Resources (NYSE:CNQ, 30-year Financials) appears to be modestly overvalued, 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 $32.14 per share and the market cap of $38.2 billion, Canadian Natural Resources stock is estimated to be modestly overvalued. GF Value for Canadian Natural Resources is shown in the chart below.
Because Canadian Natural Resources is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 1.26% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Canadian Natural Resources has a cash-to-debt ratio of 0.02, which is in the bottom 10% of the companies in Oil & Gas industry. GuruFocus ranks the overall financial strength of Canadian Natural Resources at 3 out of 10, which indicates that the financial strength of Canadian Natural Resources is poor. This is the debt and cash of Canadian Natural Resources 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. Canadian Natural Resources has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $13.1 billion and loss of $0.209 a share. Its operating margin is -2.54%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Canadian Natural Resources at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Canadian Natural Resources 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Canadian Natural Resources is -1.6%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -11.9%, which ranks in the middle range of the companies in Oil & Gas industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Canadian Natural Resources's return on invested capital is -0.30, and its cost of capital is 11.18. The historical ROIC vs WACC comparison of Canadian Natural Resources is shown below:
In conclusion, The stock of Canadian Natural Resources (NYSE:CNQ, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Canadian Natural Resources stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
