In this article I won't be giving a full analysis of Chesapeake (CHK) with its pros and cons (there are plenty of articles to find about this on Seeking Alpha) but I will be giving a short, clarifying and realistic earnings model mostly for investors who already own Chesapeake shares. This model could definitely influence their opinion about their investment, and with this model I hope they can implement realistic expectations about whether or not they will be getting their money back in the near future.
I used the following assumptions for my earnings model:
-A year-on-year moderate revenue growth of 5.50% (this could easily be more as it has been reporting average 9.5% revenue growth in the past 5 years, but I want to show you the "worst case scenario")
-A declining cost of revenue from 55% to 52% (as I expect gas prices to recover a bit within 2 years)
-A year-on-year increase of 4% in operating expense
-A tax rate of 40% (close to its current tax rate of 38%-39%)
According to my earnings estimate, Chesapeake should be able to achieve healthy net margins again. I expect the company to post EPS of $2.21 by the end of 2017.
For the valuation purposes, I have assumed a discount rate of 15%. Taking into account the strong position of the company, but the weak balance sheet, I believe a discount rate of 15% is justified. Following my valuation model, Chesapeake is currently 28% overvalued. A buying opportunity occurs at around $17. In the long term I believe Chesapeake is on its way to hit $28 a share. This gives the stock an upside potential of 28.72% within 4 years.
People who bought Chesapeake a few months/years ago when it was peaking are probably not quite satisfied with their investment return. Even though the stock has let them down, they shouldn't become too desperate as they might see some or most of their money back within a few years.