In this installment of my analysis of recent purchases made by renowned investors and funds, I will analyze five major purchases recently made by Citadel Advisors in the technology sector during Q4 2011. The companies selected for analysis are shown below.
- Devon Energy Corporation (DVN)
- EOG Resources (EOG)
- Halliburton (HAL)
- Superior Energy Services (SPN)
- Pioneer Natural Resources (PXD)
Citadel added significant positions in all these firms during the last quarter. Though none of these companies were new positions, the percentage change in all the stocks exceeded 150% with the biggest change in EOG (2,961%) and smallest change in SPN (156%).
In the article I will evaluate the fundamentals of these companies and perform relative valuation to determine the attractiveness of the companies at current levels.
Some basic information about the companies is presented in the table that follows:
Company Basics | |||||
Market Cap (billion) | 29.5 | 30.65 | 33.27 | 4.66 | 13.36 |
Debt to Equity Ratio | 28% | 40% | 31% | 56% | 51% |
Stock Performance 5 Yr | 13% | 73% | 16% | -8% | 186% |
Stock Performance 1 Yr | -20% | 4% | -23% | -24% | 8% |
Dividend Yield | 1.1% | 0.6% | 1.0% | 0.0% | 0.1% |
DVN, EOG and HAL have a very similar market capitalization in the $29 billion to $33 billion. SPN is a relatively smaller firm with a market capitalization of $4.66 billion. DVN, HAL and SPN have badly trailed the market during the last year while PXD has advanced by 186% over the last 5 years. PXD and EOG are the only firms on the list showing positive returns during the previous 1 year and 5 year periods. Additionally, none of the stocks offer a sizeable dividend.
Next, I observed the historical growth rates of revenue, income and book value, and the projected long term earnings growth rates. These are summarized in the table shown below:
Growth Rates | |||||
Revenue | |||||
10 Year | 10% | 25% | 7% | 17% | 15% |
5 Year | 2% | 21% | 2% | 14% | 11% |
1 Year | 15% | 66% | 38% | 23% | 13% |
Income | |||||
10 Year | 46% | 29% | - | 21% | 41% |
5 Year | 11% | -3% | 4% | -5% | 2% |
1 Year | 3% | 578% | 55% | 74% | 38% |
EPS | |||||
10 Year | 43% | 29% | - | 19% | 40% |
5 Year | 12% | -5% | 7% | -5% | 3% |
1 Year | 9% | 551% | 53% | 71% | 35% |
Book Value | |||||
10 Year | 13% | 22% | 13% | 15% | 14% |
5 Year | 6% | 16% | 15% | 15% | 15% |
1 Year | 16% | 18% | 26% | 12% | 30% |
Growth Projections | |||||
Next Year | 17% | 36% | 16% | 22% | 41% |
Next 5 Year | 8% | 69% | 27% | 41% | 10% |
All the companies have grown their revenues and book value at a double digit pace last year. With the exception of DVN, the companies have also demonstrated strong earnings growth rates. Going forward, this trend is expected to continue with EOG leading the way. However, for my analysis, I was have assumed a 36% long term growth rate for EOG and 28% for SPN.
I also evaluated the return on invested capital and capex as a percentage of sales to compare the individual companies with their historical averages.
Operations | |||||
Averages | |||||
ROIC | |||||
10 Year | 8% | 14% | 10% | 8% | 8% |
5 Year | 6% | 11% | 18% | 8% | 6% |
Last Year | 17% | 7% | 18% | 5% | 11% |
TTM | 17% | 7% | 18% | 5% | 11% |
Capex/Sales | |||||
10 Year | 57% | 72% | 8% | 20% | 8% |
5 Year | 62% | 81% | 12% | 23% | 6% |
Last Year | 66% | 69% | 12% | 23% | 11% |
TTM | 66% | 69% | 12% | 23% | 11% |
DVN and HAL have posted respectable ROIC during the last year. EOG and SPN have offered returns on invested capital to their investors in my opinion. EOG has however reduced its capex over the last 5 years. SPN has been very consistent with regards to capex as a percentage of sales.
Having developed a good idea about the fundamentals of the 5 companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples. The table below presents the valuation analysis results.
Valuation | |||||
TTM EPS | $6.29 | $4.97 | $3.90 | $3.31 | $5.45 |
EPS Growth Rate | 8% | 48% | 27% | 29% | 10% |
Future EPS (5 Yr) | $8.56 | $23.85 | $10.15 | $9.17 | $7.98 |
Expected P/E | 11 | 10 | 8.4 | 9.1 | 10 |
Price 5 Yrs Out | $94.13 | $238.45 | $85.22 | $83.41 | $79.79 |
Unlevered Beta | 0.85 | 0.91 | 1.27 | 1.27 | 1.3 |
D/E Ratio | 33% | 16% | 14% | 36% | 54% |
Current Tax Rate | 35% | 35% | 33% | 35% | 35% |
Levered Beta | 1.03 | 1.01 | 1.39 | 1.57 | 1.76 |
Risk Free Rate | 2% | 2% | 2% | 2% | 2% |
Risk Premium | 9.00% | 9.00% | 9.00% | 9.00% | 9.00% |
Size Premium | -0.36% | -0.36% | -0.36% | 0.74% | 0.62% |
Cost of Equity | 10.9% | 10.7% | 14.2% | 16.9% | 18.4% |
Fair Value | $56.02 | $143.45 | $43.92 | $38.24 | $34.23 |
Current Price | $73.00 | $113.90 | $36.05 | $30.04 | $30.04 |
% Overvalued | 23% | -26% | -22% | -27% | -14% |
As shown in the table above, EOG, HAL and SPN are significantly undervalued at current levels. PXD is also moderately undervalued. DVN is grossly overvalued and should be avoided in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
