Archrock Inc. (NYSE:AROC) recently experienced a daily gain of 5.17%, with a 3-month gain of 30.06%. Despite these positive changes and an Earnings Per Share (EPS) (EPS) of 0.43, the question remains: is the stock significantly overvalued? This article will provide an in-depth analysis of Archrock's valuation, encouraging readers to delve into the subsequent financial exploration.
Archrock Inc is a leading energy infrastructure company with a focus on midstream natural gas compression. It operates two main segments: Contract Operations and Aftermarket Services. Archrock's Contract Operations segment provides comprehensive services to meet customers' natural gas compression needs, including designing, owning, installing, operating, and maintaining equipment. The Aftermarket Services segment offers a full range of services to support the compression needs of customers who own compression equipment. As of September 27, 2023, Archrock's stock is priced at $13.19 per share, with a market cap of $2.10 billion, indicating a potential overvaluation compared to its GF Value of $9.92.
Understanding GF Value
The GF Value is a proprietary measure that represents the intrinsic value of a stock. It is based on historical trading multiples, a GuruFocus adjustment factor reflecting past returns and growth, and future business performance estimates. When the stock price significantly exceeds the GF Value Line, it implies overvaluation and potentially poor future returns. Conversely, if the price is significantly below the GF Value Line, higher future returns are likely.
Given its current price of $13.19 per share and a market cap of $2.10 billion, Archrock appears to be significantly overvalued according to the GF Value calculation. This overvaluation suggests that the long-term return of its stock is likely to be much lower than its future business growth.
Investing in companies with low financial strength could result in permanent capital loss. As such, it's crucial to examine a company's financial strength before deciding to invest. Archrock's cash-to-debt ratio of 0 ranks worse than 0% of companies in the Oil & Gas industry, suggesting a poor balance sheet.
Profitability and Growth
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. Archrock has been profitable 7 out of the past 10 years. Its operating margin is 20.97%, ranking better than 68.39% of companies in the Oil & Gas industry. However, Archrock's 3-year average annual revenue growth is -7.7%, ranking worse than 81.21% of companies in the industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) is another way to assess profitability. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Archrock's ROIC was 5.82, while its cost of capital was 8.1.
In summary, Archrock's stock appears to be significantly overvalued. While the company's profitability is fair, its financial condition is poor and its growth ranks worse than 75.51% of companies in the Oil & Gas industry. To learn more about Archrock stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.