- By GF Value
The stock of Texas Pacific Land (NYSE:TPL, 30-year Financials) is estimated 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 $1507 per share and the market cap of $11.7 billion, Texas Pacific Land stock gives every indication of being significantly overvalued. GF Value for Texas Pacific Land is shown in the chart below.
Because Texas Pacific Land is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 25.6% over the past five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Texas Pacific Land has a cash-to-debt ratio of 117.05, which which ranks better than 84% of the companies in Oil & Gas industry. The overall financial strength of Texas Pacific Land is 7 out of 10, which indicates that the financial strength of Texas Pacific Land is fair. This is the debt and cash of Texas Pacific Land 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. Texas Pacific Land has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $287.4 million and earnings of $21.75 a share. Its operating margin is 72.63%, which ranks better than 98% of the companies in Oil & Gas industry. Overall, the profitability of Texas Pacific Land is ranked 10 out of 10, which indicates strong profitability. This is the revenue and net income of Texas Pacific Land 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 Texas Pacific Land is 25.6%, which ranks better than 90% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is 17.3%, which ranks better than 70% 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, Texas Pacific Land's return on invested capital is 60.83, and its cost of capital is 15.96. The historical ROIC vs WACC comparison of Texas Pacific Land is shown below:
In conclusion, the stock of Texas Pacific Land (NYSE:TPL, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 70% of the companies in Oil & Gas industry. To learn more about Texas Pacific Land stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.