Total SA (TOT) is an energy supermajor that has seen its share price tumble in the wake of the coronavirus epidemic. However, while this short-term event has dented the share price, I contend that the quality of the underlying business remains top-tier, and that a value opportunity is being presented.
Crude oil is down more than 20% from a high in early January. Chart generated by FinViz.
The global economy in general, and the Chinese economy in particular, has been hindered by the epidemic, and demand for crude oil has dwindled, leading to an excess of supply. While I certainly cannot forecast when the epidemic will be contained - and its recent spread worldwide would make it foolish to even attempt such a forecast - I am confident that it will be contained eventually, and that the current panic amounts to a serious but short-term event.
The ADR for Total SA is currently trading on the New York Stock Exchange in the mid-$40 price range. Chart generated by FinViz.
This leads me to see Total as a potential value opportunity at this time. Currently, Total's sponsored ADR is trading at a share price of $43.31 with a price-to-earnings ratio of 10.51, as earnings per share (trailing twelve months) is $4.18. It also sports a dividend yield of 6.67%, which is higher than the five-year average dividend yield of 5.42%. The current P/E, meanwhile, is considerably lower than the five-year average P/E of 27.29. It seems that Total is trading at a considerable discount to fair value, which begs the question: what is fair value for Total?
To determine fair value, I will look at three different valuation methods. First, I value the firm with a P/E of 15 on the basis that this is the historical market average, arriving at a fair value estimate of $61.87 based on earnings-per-share of $4.18. Secondly, I will value the firm on the basis of its five-year average P/E of 27.29, arriving at a fair value estimate of $111.05. Thirdly, I will value the firm on its five-year average dividend yield of 5.42%, which results in a fair value of $53.47. Finally, I will average out these three estimates, arriving at a final estimate for fair value of $75.46. On the basis of this estimate, the stock is undervalued by 74%.
That Total is a viable investment trading at a discount can be gleaned from assessing the revenue and net income figures that this French oil titan has reported over the past five years.
|Year||Revenue (€)||Revenue ($)||Net Income (€)||Net Income ($)|
|2015||129.33 billion||140.81 billion||4.59 billion||5 billion|
|2016||115.64 billion||125.90 billion||5.6 billion||6.10 billion|
|2017||132.19 billion||143.92 billion||7.65 billion||8.33 billion|
|2018||156.06 billion||169.91 billion||9.7 billion||10.56 billion|
|2019||157.47 billion||171.44 billion||10.07 billion||10.96 billion|
Figures collated from Total's investor relations page and from Seeking Alpha.
Total's revenues only dipped in 2016, as a consequence of the general downturn the entire energy sector suffered in 2015-16. It has earned consistently rising revenue since then. It is important to note, however, that the net income continued to increase without impairment from 2015 onwards, not being impaired by the downturn.
That Total could post consistently rising net income figures throughout this period testifies to its excellent cost discipline and to its key competitive advantage: its highly-integrated business model. Total divides its operations into three segments: upstreaming; refining and chemicals; and marketing and services. The latter two constitute Total's downstreaming business.
Total's business model enables it to remain profitable under most, if not all, economic conditions. Image provided by The News Minute.
Upstreaming - searching for and drilling crude oil and natural gas, underground and underwater - is profitable when energy prices are high. Downstreaming - refining crude oil, purifying natural gas, marketing and distributing the products of these - is profitable when energy prices are low. By having both businesses in operation, Total ensures it is an all-weather energy investment, able to remain sustainably profitable in almost all economic circumstances.
Management's ability to extract profit from Total's upstreaming and downstreaming operations is evident from the 7.22% operating margin, and the shareholder-friendly nature of Total is evident from two factors. First, the 8.40% return on equity (trailing twelve months), and second, the dividend record. While the ADR record fluctuates, the primary stock record shows that Total has been paying dividends steadily for 35 years, either raising them or keeping them stable. Its 53.29% payout ratio and positive free cash flow of €11.5 billion ($12.52 billion) suggest that this dividend will continue to be steadily paid for the foreseeable future.
The security of the dividend is further assured by Total's strong balance sheet. Long-term debt of €42.56 billion ($46.34 billion) is dwarfed by a net worth of €106.29 billion ($115.72 billion), and total current liabilities of €62.58 billion ($68.13 billion) are more than offset by total current assets of €75.96 billion ($82.70 billion), cash-on-hand worth €24.37 billion ($26.53 billion), short-term investments worth €3.56 billion ($3.88 billion), and total accounts receivable of €16.47 billion ($17.93 billion). Total's short-term and long-term finances are solid, and this, in tandem with its profitability, should remain so over the long-term.
Looking forward, by 2030 Total aims to have reduced the carbon intensity of its emissions by 15% from 2015 levels. In tandem with the reduction of its carbon footprint, Total is also seeking to grow its renewable energy business. To that end, it has recently announced that its Total Solar International subsidiary has entered into separate deals with solar plant developer Poweritis and with Spanish firm Solarbay to develop 2 gigawatts of projects in Spain. In addition, Total also recently increased its stake in solar solutions provider SunPower (SPWR), and is the top shareholder in the firm with approximately 82.2 million shares.
In summary, Total is currently a stock that beckons value investors to "be greedy when others are fearful." The fear generated by the coronavirus epidemic has brought Total's share price down, but the fundamental business remains a solid one that will outlast the current panic, and is looking to become a bigger player in the renewables market. Its strong balance sheet, excellent dividend record and durable business model make Total a buy at its current discounted valuation.