Helmerich & Payne (HP)'s Hidden Bargain: An In-Depth Look at the 25% Margin of Safety Based ...
Helmerich & Payne Inc (NYSE:HP) has recently experienced a daily gain of 2.94%, and a commendable 3-month gain of 25.34%. The company's Earnings Per Share (EPS) (EPS) stands at 3.81. Given these figures, the question arises: is this stock significantly undervalued? This article aims to provide an in-depth analysis of Helmerich & Payne's valuation, encouraging readers to delve into the financial intricacies of this potentially undervalued stock.
Company Overview
Helmerich & Payne, boasting the largest fleet of U.S. land drilling rigs, is a major player in the Oil & Gas industry. The company's FlexRig line is the leading choice for drilling horizontal wells for the production of U.S. tight oil and gas. With a presence in almost every major U.S. shale play and a growing international footprint, Helmerich & Payne is a force to be reckoned with. The company's stock is currently trading at $43.83, while the GF Value, an estimation of its fair value, stands at $67.34. This discrepancy suggests that the stock could be significantly undervalued.
Understanding the GF Value
The GF Value is a unique metric that represents the current intrinsic value of a stock. It is calculated based on historical multiples 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, it is considered overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Based on this valuation method, Helmerich & Payne (NYSE:HP) appears to be significantly 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. At its current price of $43.83 per share, Helmerich & Payne's stock shows every sign of being significantly undervalued.
Because Helmerich & Payne is significantly undervalued, the long-term return of its stock is likely to be much higher than its business growth.
Evaluating Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to carefully review a company's financial strength before deciding 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. Helmerich & Payne has a cash-to-debt ratio of 0.54, which ranks better than 50.64% of 1021 companies in the Oil & Gas industry. Based on this, GuruFocus ranks Helmerich & Payne's financial strength as 8 out of 10, suggesting a strong balance sheet.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Helmerich & Payne has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $2.80 billion and an Earnings Per Share (EPS) of $3.81. Its operating margin of 17.87% is better than 64.84% of 967 companies in the Oil & Gas industry. Overall, GuruFocus ranks Helmerich & Payne's profitability as fair.
Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Helmerich & Payne is-9%, which ranks worse than 82% of 850 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is -4.7%, which ranks worse than 74.02% of 820 companies in the Oil & Gas industry.
ROIC vs WACC
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, Helmerich & Payne's return on invested capital is 10.13, and its cost of capital is 10.49.
Conclusion
In conclusion, the stock of Helmerich & Payne (NYSE:HP) appears to be significantly undervalued. The company's financial condition is strong, and its profitability is fair. However, its growth ranks worse than 74.02% of 820 companies in the Oil & Gas industry. To learn more about Helmerich & Payne's stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
