– By GF Value
The stock of PJSC Lukoil (OTCPK:LUKOY, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $76.17 per share and the market cap of $49.7 billion, PJSC Lukoil stock appears to be significantly overvalued. GF Value for PJSC Lukoil is shown in the chart below.
Because PJSC Lukoil is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. PJSC Lukoil has a cash-to-debt ratio of 0.52, which is in the middle range of the companies in Oil & Gas industry. The overall financial strength of PJSC Lukoil is 7 out of 10, which indicates that the financial strength of PJSC Lukoil is fair. This is the debt and cash of PJSC Lukoil over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. PJSC Lukoil has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $83.7 billion and earnings of $0.306 a share. Its operating margin is 5.33%, which ranks better than 68% of the companies in Oil & Gas industry. Overall, the profitability of PJSC Lukoil is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of PJSC Lukoil over the past years:
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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of PJSC Lukoil is -0.1%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -13.2%, which ranks worse than 67% of the companies in Oil & Gas industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, PJSC Lukoil’s ROIC was 0.95, while its WACC came in at 10.60. The historical ROIC vs WACC comparison of PJSC Lukoil is shown below:
In closing, PJSC Lukoil (OTCPK:LUKOY, 30-year Financials) stock gives every indication of being significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks worse than 67% of the companies in Oil & Gas industry. To learn more about PJSC Lukoil stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.