The stock of BP Prudhoe Bay Royalty Trust (NYSE:BPT, 30-year Financials) appears to be significantly 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 $4.25 per share and the market cap of $91 million, BP Prudhoe Bay Royalty Trust stock gives every indication of being significantly overvalued. GF Value for BP Prudhoe Bay Royalty Trust is shown in the chart below.
Because BP Prudhoe Bay Royalty Trust is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. BP Prudhoe Bay Royalty Trust has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in Oil & Gas industry. The overall financial strength of BP Prudhoe Bay Royalty Trust is 6 out of 10, which indicates that the financial strength of BP Prudhoe Bay Royalty Trust is fair. This is the debt and cash of BP Prudhoe Bay Royalty Trust 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. BP Prudhoe Bay Royalty Trust has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $-0.1 million and loss of $0.049 a share. Its operating margin is -17.07%, which ranks worse than 73% of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of BP Prudhoe Bay Royalty Trust at 5 out of 10, which indicates fair profitability. This is the revenue and net income of BP Prudhoe Bay Royalty Trust over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of BP Prudhoe Bay Royalty Trust is -50.9%, which ranks in the bottom 10% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is -53.8%, which ranks in the bottom 10% of the companies in Oil & Gas industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, BP Prudhoe Bay Royalty Trust's return on invested capital is 0.00, and its cost of capital is 7.51. The historical ROIC vs WACC comparison of BP Prudhoe Bay Royalty Trust is shown below:
In conclusion, the stock of BP Prudhoe Bay Royalty Trust (NYSE:BPT, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Oil & Gas industry. To learn more about BP Prudhoe Bay Royalty Trust 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.
