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As a long term play we like Apache Corp (APA). It's been consolidating since June and appears to be putting in a bottom formation. It has a very low payout ratio of 7%, a good free cash flow yield of 7.55% and a projected EPS growth rate of 27% for 2013, according to Zack's. However, before we examine a company in detail, we put it through an initial selection process (that is described below) to make sure it meets certain basic requirements. Apache Corp met or exceeded all the listed criteria. The next step is to examine the company from a fundamental and technical perspective.

Our initial screening process:

1) A strong positive levered free cash flow

2) A payout ratio below 25%

3) A retention rate in excess of 80%.

4) Cash flow per share should be trending upwards for the past 3 years

5) Net income should be trending upwards for the past 3 years

6) Annual EPS before NRI should be trending upwards for the past three years

7) An interest coverage ratio of 10 or higher

8) Operating margins in excess of 40%

9) A 3-5 year projected EPS growth rate in excess of 6%

Points of interest

  • A very low payout ratio of 7%
  • A very high retention rate of 93%
  • Zacks has a projected EPS growth rate for 2013 of 6%. EPS is projected to increase from $9.86 in 2012 to $10.54 in 2013.
  • A strong positive levered free cash flow of $1.96 billion
  • Sales vs. 1 year ago increased by 39.7%
  • A five year sales growth rate of 11.6%
  • Very healthy operating margins of 46%
  • The recent BP (BP) acquisitions, the purchase of a portion of Devon Energy’s (DVN) GoM (Gulf of Mexico) assets, and the deal to acquire Marin Energy will help compliment the company’s asset base and contribute to earnings going forward.
  • Cash flow should improve from its operations in Australia, which it has been growing steadily over the past few years.

The Technical Picture

(click to enlarge)

The stock has strong resistance in the $90-$91.00 ranges. The last time it traded above this zone (September 13th and 14th) it could not hold onto its gains and shed them all in a matter of days. On the other hand, it has a pretty good level of support in the $78-$80.00 ranges. A retest of this zone could lead to a double bottom formation. Double bottom formations are bullish in nature and usually signal that the stock is ready to trend higher. We would wait until the $78.00-$80.00 ranges are tested again before putting money into this play. If you are looking to open a long position without actually having to initially purchase the stock, you could sell naked puts at $79.00 or better and use the proceeds to open a long position by purchasing calls. As long as the stock does not close below $77.00 on a weekly basis the outlook will remain neutral to bullish. A weekly close above $92.00 should lead to a test of $100.00.

The competition

We are going to pit Apache Corp against three competitors using several key metrics such as P/E, quarterly revenue growth, operating margins, PEG, etc. This will give you further insight into the company, and it could also help you determine if Apache Corp is the right play for you. Its gross margins and operating margins are well above the industry average of 0.64 and -0.13. It also sports a P/E of 9.3 that is well below the industry average of 17.00, though its 3 competitors below all sport more favorable P/E ratios.

APA

(BP)

(COP)

(XOM)

Industry

Quarterly Revenue growth

-0.08

-0.08

-0.75

-0.07

0.16

Revenue

16.92

376.60B

186.13B

434.82B

16.27M

Gross Margin

0.84

0.13

0.24

0.29

0.64

EBITDA

12.7B

36.13B

27.18B

65.40B

-87.01K

Operating Margin

0.46

0.06

0.10

0.11

-0.13

Net Income

3.27

17.26B

10.99B

45.09B

N/A

EPS

8.3

5.38

8.15

9.49

N/A

P/E

9.3

7.75

7.03

9.55

17.29

PEG (5 yr expected):

1.59

3.28

-0.83

1.84

0.79

P/S

1.92

0.35

0.37

0.96

4.68

M= Million B= Billion

Charts and Data of value

(click to enlarge)

Stocks tend to perform better when they are trending above the EPS consensus line. In this case, Apache is trading below the EPS consensus line and this could explain why it has been range bound for the past several months. However the EPS is projected to increase going forward and this should help the stock trade above the EPS consensus line in the not too distant future and so it could pay to establish an early position.

(click to enlarge)

The blue shaded area represents the dividends. The orange line represents the valuation growth rate line. Generally speaking, when the stock is trading below this line and in the shaded green area, it represents a good long term entry point. As Apache is trading well below this line, it makes for a good long term investment.

Earnings per share have been increasing for the past 3 years (2009-2011). Zacks projects that the EPS will rise to $10.54 per share in 2013, an increase of 6% over its 2012 estimate of $9.86. In the end it all boils down to earnings. A company that continues to experience earnings growth is more likely to trend higher than a company that is showing signs of slowing down.

Fundamental data

The data below is laid out in such a manner that it should be easy for you to quickly scroll down and determine if the stock meets with your minimum investment criteria. Some of the key areas to focus on are sales, net income, annual EPS before NRI, Interest coverage ratio, cash flow and 3-5 year projected EPS growth rates.

Company: Apache Corp

Key ratios

1. Operating Margin = 46.7%

2. Long term debt to equity ratio = 0.33

3. Levered free cash flow = $1.96B

4. Quarterly Revenue Growth = -8.4%

5. Quarterly Earnings Growth = -71%

6. Operating Cash Flow = $10.3B

7. 5 year sales growth rate = 11.6%

8. Percentage Held by Institutions = 83.5%

9. Sales vs. 1 year ago = 39.7%

Growth

1. Net Income ($mil) 12/2011 = 4584

2. Net Income ($mil) 12/2010 = 3032

3. Net Income ($mil) 12/2009 = -285

4. EBITDA ($mil) 12/2011 = 12297

5. EBITDA ($mil) 12/2010 = 8289

6. EBITDA ($mil) 12/2009 = 5539

7. Cash Flow ($/share) 12/2011 = 23.36

8. Cash Flow ($/share) 12/2010 = 17.22

9. Cash Flow ($/share) 12/2009 = 21.05

10. Sales ($mil) 12/2011 = 16888

11. Sales ($mil) 12/2010 = 12092

12. Sales ($mil) 12/2009 = 8615

13. Annual EPS before NRI 12/2007 = 8.46

14. Annual EPS before NRI 12/2008 = 11.61

15. Annual EPS before NRI 12/2009 = 5.52

16. Annual EPS before NRI 12/2010 = 8.92

17. Annual EPS before NRI 12/2011 = 11.93

Dividend history

1. Dividend Yield = 0.8

2. Dividend Yield 5 Year Average = 0.60

3. Payout Ratio = 0.07

4. Payout Ratio 5 Year Average = 0.07

The payout ratio is very low, so it can easily raise its dividends for years to come.

Performance

1. Next 3-5 Year Estimate EPS Growth rate = 6.41

2. ROE 5 Year Average = 17.99

3. Return on Investment = 13.83

4. Current Ratio = 0.9

5. Current Ratio 5 Year Average = 1.41

6. Quick Ratio = 0.6

7. Interest Coverage = 16.00

Conclusion

The stock is building a nice base, and as long as it does not close below $77.00 on a weekly basis the long-term outlook will remain bullish. Investors should consider waiting for a test of the $78.00-$80.00 ranges before jumping into this play. Alternatively, you could sell puts at strikes you would not mind owning the stock. The benefit of this strategy is that it reduces your overall cost as you get to apply the premium towards your purchase. Additionally, if the shares are not put to your account, you get paid for your efforts via the premium. The disadvantage is that there is no guarantee that shares will be assigned to your account, even if the stock trades below the strike price you sold the puts at.

EPS and EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware

Source: Apache Corp: Wait For A Test Of The $78-$80 Ranges Before Getting In