Teekay Tankers (TNK): A Detailed Look at Its Overvaluation
Teekay Tankers Ltd (NYSE:TNK) experienced a daily gain of 4.48% and a 3-month gain of 12.77%. Despite these significant gains, the company's Earnings Per Share (EPS) stands at 15.51, raising questions about whether the stock is significantly overvalued. This article seeks to answer this question by providing an in-depth valuation analysis of Teekay Tankers. We invite you to journey with us as we delve into the financials and operations of this notable player in the global oil and gas industry.
Company Overview
Teekay Tankers Ltd is a leading provider of marine services to the global oil and natural gas industries. It operates medium-sized oil tankers and offers ship-to-ship transfer services. The company's operations are divided into two segments: tanker and ship-to-ship transfer, with the vast majority of its revenue coming from the tanker segment.
As of September 08, 2023, Teekay Tankers has a market cap of $1.40 billion. Its stock price stands at $40.61 per share, a figure that significantly surpasses its GF Value of $30.17. This discrepancy suggests that the stock may be overvalued.
Understanding the GF Value
The GF Value is a proprietary measure that reflects the intrinsic value of a stock. It is calculated based on historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be trading.
If the stock price significantly exceeds the GF Value Line, the stock is overvalued, and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher. Based on this measure, Teekay Tankers appears to be significantly overvalued.
Given this overvaluation, the long-term return of Teekay Tankers' stock is likely to be much lower than its future business growth.
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Financial Strength
Before investing in a company, it is crucial to assess its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage are key indicators of a company's financial strength. Teekay Tankers has a cash-to-debt ratio of 0.6, which is better than 52.3% of 1021 companies in the Oil & Gas industry. The overall financial strength of Teekay Tankers is 8 out of 10, indicating strong financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Teekay Tankers has been profitable 6 times over the past 10 years. The company had a revenue of $1.40 billion over the past twelve months and an Earnings Per Share (EPS) of $15.51. Its operating margin is 40.05%, which ranks better than 82.63% of 967 companies in the Oil & Gas industry. Overall, the profitability of Teekay Tankers is ranked 7 out of 10, indicating fair 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. However, the 3-year average annual revenue growth of Teekay Tankers is 3.5%, which ranks worse than 63.88% of 850 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 12.6%, which ranks worse than 51.46% of 820 companies in the Oil & Gas industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to determine 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Teekay Tankers' ROIC is 36.56, and its WACC is 5.01.
Conclusion
In conclusion, Teekay Tankers' stock appears to be significantly overvalued. The company's financial condition is strong, and its profitability is fair. However, its growth ranks worse than 51.46% of 820 companies in the Oil & Gas industry. For more information about Teekay Tankers stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
