- By GF Value
The stock of Amplify Energy (NYSE:AMPY, 30-year Financials) appears to be modestly undervalued, 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 $3.913 per share and the market cap of $148.6 million, Amplify Energy stock appears to be modestly undervalued. GF Value for Amplify Energy is shown in the chart below.
Because Amplify Energy is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which is estimated to grow 1.75% annually over the next three to five years.
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. Amplify Energy has a cash-to-debt ratio of 0.06, which ranks worse than 82% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Amplify Energy's financial strength as 2 out of 10, suggesting poor balance sheet. This is the debt and cash of Amplify Energy over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Amplify Energy has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $216.5 million and loss of $3.08 a share. Its operating margin is 1.81%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, the profitability of Amplify Energy is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Amplify Energy over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Amplify Energy's 3-year average revenue growth rate is worse than 73% of the companies in Oil & Gas industry. Amplify Energy's 3-year average EBITDA growth rate is -167.7%, which ranks in the bottom 10% of the companies in Oil & Gas industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Amplify Energy's ROIC was 1.00, while its WACC came in at 14.08. The historical ROIC vs WACC comparison of Amplify Energy is shown below:
In closing, The stock of Amplify Energy (NYSE:AMPY, 30-year Financials) is estimated to be modestly undervalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Oil & Gas industry. To learn more about Amplify Energy stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.