Oil Stocks- Marathon Oil Stock Appears To
The stock of Marathon Oil (NYSE:MRO, 30-year Financials) shows every sign of being 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 $13.46 per share and the market cap of $10.6 billion, Marathon Oil stock gives every indication of being significantly overvalued. GF Value for Marathon Oil is shown in the chart below.
Because Marathon Oil is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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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. Marathon Oil has a cash-to-debt ratio of 0.21, which is in the middle range of the companies in Oil & Gas industry. The overall financial strength of Marathon Oil is 4 out of 10, which indicates that the financial strength of Marathon Oil is poor. This is the debt and cash of Marathon Oil over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Marathon Oil has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $3.3 billion and loss of $1.66 a share. Its operating margin of -21.75% worse than 76% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Marathon Oil’s profitability as fair. This is the revenue and net income of Marathon Oil over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Marathon Oil’s 3-year average revenue growth rate is in the middle range of the companies in Oil & Gas industry. Marathon Oil’s 3-year average EBITDA growth rate is -19.1%, which ranks worse than 71% of the companies in Oil & Gas industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Marathon Oil’s return on invested capital is -4.09, and its cost of capital is 16.16. The historical ROIC vs WACC comparison of Marathon Oil is shown below:
To conclude, the stock of Marathon Oil (NYSE:MRO, 30-year Financials) appears to be significantly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks worse than 71% of the companies in Oil & Gas industry. To learn more about Marathon Oil stock, you can check out its 30-year Financials here.
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