Callon Petroleum Co (CPE): A Comprehensive Analysis of Its Fair Valuation
Callon Petroleum Co (NYSE:CPE) has recently experienced a daily loss of 6.15%, and a 3-month loss of 1.71%. Despite these fluctuations, the company's Earnings Per Share (EPS) stands strong at 15.12. The question we aim to answer is, "Is the stock fairly valued?"
Our valuation analysis of Callon Petroleum Co suggests a fair valuation. We encourage you to delve into the following analysis to gain a greater understanding of the company's financial status.
Company Introduction
Callon Petroleum Company is an industry leader in the exploration, development, acquisition, and production of oil and natural gas. The company's operations are primarily concentrated in the Permian Basin region of West Texas and southeastern New Mexico. Callon Petroleum Co relies heavily on the latest horizontal production techniques to extract hydrocarbon products from its assets, with crude oil accounting for over half of production.
At the current price of $34.19 per share, Callon Petroleum Co's stock appears to be fairly valued according to the GF Value, an estimation of fair value based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. This measure is derived from three key factors: historical multiples (including PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, a GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of business performance.
The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, the stock may be overvalued and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, the stock may be undervalued and its future return will likely be higher.
Given that Callon Petroleum Co is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
These companies may deliver higher future returns at reduced risk.
Financial Strength
Before investing in a company's stock, it's crucial to examine its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are great indicators of a company's financial strength. Callon Petroleum Co has a cash-to-debt ratio of 0, which is worse than 0% of 1026 companies in the Oil & Gas industry. The overall financial strength of Callon Petroleum Co is 5 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. Companies with high profit margins are typically safer investments than those with low profit margins. Callon Petroleum Co has been profitable 7 times over the past 10 years. Over the past twelve months, the company had a revenue of $2.70 billion and Earnings Per Share (EPS) of $15.12. Its operating margin is 42.6%, which ranks better than 85.6% of 979 companies in the Oil & Gas industry. Overall, GuruFocus ranks Callon Petroleum Co's profitability at 8 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. Faster growing companies create more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Callon Petroleum Co is 22%, which ranks better than 73.72% of 860 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 23.4%, which ranks better than 61.02% of 826 companies in the Oil & Gas industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC) is another way to assess its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. The return on invested capital should ideally be higher than the weighted cost of capital. For the past 12 months, Callon Petroleum Co's return on invested capital is 23.6, and its cost of capital is 10.97.
Conclusion
Overall, Callon Petroleum Co (NYSE:CPE) stock appears to be fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 61.02% of 826 companies in the Oil & Gas industry. To learn more about Callon Petroleum Co stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
