Devon Energy Corp (DVN, Financial) experienced a daily loss of -3.11 % and a 3-month loss of -5.39%. Despite these losses, the company reported an impressive Earnings Per Share (EPS) of 7.31. This raises the question: is the stock modestly undervalued? In this article, we delve into the valuation analysis of Devon Energy (DVN) to provide an answer to this question. Read on for a comprehensive exploration of the company's value.
Company Introduction
Based in Oklahoma City, Devon Energy is one of the largest independent exploration and production companies in North America. The company's assets are spread throughout onshore North America, including the Delaware, STACK, Eagle Ford, Powder River Basin, and Bakken plays. As of the end of 2022, Devon's proved reserves amounted to 1.8 billion barrels of oil equivalent, with a net production of 611 thousand boe/d. The company's oil and natural gas liquids made up 73% of production, with natural gas accounting for the remainder.
Devon Energy's stock price is currently $44.33, with a market cap of $28.40 billion. When compared to the GF Value of $52.09, the stock appears to be modestly undervalued. The following is the income breakdown of Devon Energy:
Understanding GF Value
The GF Value is a unique measure that provides an estimation of a stock's intrinsic value. It is calculated based on historical multiples, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
According to the GF Value, Devon Energy (DVN, Financial) appears to be modestly undervalued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns.
Given that Devon Energy is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Evaluating Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. A good initial perspective on the company's financial strength can be gained by looking at the cash-to-debt ratio and interest coverage. Devon Energy has a cash-to-debt ratio of 0.07, which ranks worse than 83.63% of 1026 companies in the Oil & Gas industry. Based on this, GuruFocus ranks Devon Energy's financial strength as 6 out of 10, suggesting a fair balance sheet.
This is the debt and cash of Devon Energy over the past years:
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Devon Energy has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $17 billion and Earnings Per Share (EPS) of $7.31. Its operating margin is 37.06%, which ranks better than 80.49% of 979 companies in the Oil & Gas industry. Overall, the profitability of Devon Energy is ranked 6 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation 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 Devon Energy is 23.7%, which ranks better than 75.93% of 860 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 56.9%, which ranks better than 86.68% of 826 companies in the Oil & Gas industry.
ROIC vs WACC
Another way to assess a company's profitability is to compare its return on invested capital (ROIC) and the weighted 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. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Devon Energy's return on invested capital is 24.3, and its cost of capital is 11.96.
The historical ROIC vs WACC comparison of Devon Energy is shown below:
Conclusion
In conclusion, the stock of Devon Energy appears to be modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 86.68% of 826 companies in the Oil & Gas industry. To learn more about Devon Energy stock, you can check out its 30-Year Financials here.
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