ENGlobal Corporation (NASDAQ:ENG), a USD$24.76M small-cap, is an oil and gas company operating in an industry which has seen an extended oil price slump since 2014. However, energy-sector analysts are forecasting for the entire industry, a highly optimistic growth of 37.46% in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the US stock market as a whole. Is the oil and gas industry an attractive sector-play right now? In this article, I’ll take you through the energy sector growth expectations, and also determine whether ENGlobal is a laggard or leader relative to its energy sector peers. View our latest analysis for ENGlobal
What’s the catalyst for ENGlobal’s sector growth?
In the past five years, the oil and gas industry growth has been negative 40%, as a result of the oil price collapse. Large energy businesses have slashed their growth expenditures by over 40% since the collapse, and reduced headcount by nearly half a million workers. However, recently the sector saw a reversal in the downturn, and in the previous year, the industry saw growth of 3.17%, though still underperforming the wider US stock market. ENGlobal lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means ENGlobal may be trading cheaper than its peers.
Is ENGlobal and the sector relatively cheap?
The oil and gas industry is trading at a PE ratio of 23x, in-line with the US stock market PE of 20x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a lower 6.21% compared to the market’s 10.44%, illustrative of the recent sector upheaval. Since ENGlobal’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ENGlobal’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ENGlobal has been an oil and gas industry laggard in the past year. If your initial investment thesis is around the growth prospects of ENGlobal, there are other oil and gas companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ENGlobal fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ENGlobal has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its oil and gas peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ENGlobal’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into ENGlobal’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other energy stocks instead? Use our free playform to see my list of over 300 other oil and gas companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.