Should Buffett Buy This Stock Again?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be, too. But even I have to admit that some growth stories are bogus -- hence this regular series.

Next up: PetroChina (NYSE: PTR  ) . Is this Chinese energy giant the real thing? Let's get right to the numbers.

Foolish facts

Metric

PetroChina

CAPS stars (out of 5) ****
Total ratings 1,767
Percent bulls 95.2%
Percent bears 4.8%
Bullish pitches 209 out of 223
Highest rated peers Total S.A. (NYSE: TOT  ) , ConocoPhillips, Royal Dutch Shell

Data current as of Oct. 6.

You and I have both read enough headlines to know that Warren Buffett is a superior investor. Still, it would be nice if we had some numbers to back up the assertion.

Here's one: $224 billion. That was PetroChina's effective market cap as of this writing. When Buffett sold in 2007, the company was worth roughly $270 billion. Well played, sir.

Fools understand the drop, but they also sense a great growth opportunity in PetroChina at present prices. "As disposable income increases, Chinese citizens will attain more independent forms of transportation. In addition, China's industrialization will spread to more rural areas of its country, only expanding its need for fuel. PTR will once again hold the record market cap by 2012," wrote Foolish investor jdr393 in August.

Numbers support this thesis. According to reporting in trade magazine Oil & Gas Journal, China is positioning itself to double its strategic petroleum reserves by 2013.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth 7.6% (19.2%) (15.2%)
Revenue growth 37.6% (5%) 28.2%
Gross margin 47.7% 51.7% 47.5%
Receivables growth 96.2% 71.2% (9.5%)
Shares outstanding 183,012 million 183,012 million 183,012 million

Source: Capital IQ, a division of Standard & Poor's.

If true, this table suggests that the magnitude of PetroChina's growth opportunity remains unrealized. Let's review:

  • Fortunately, both normalized net income and revenue growth have returned, but I'd much rather see earnings growing faster than revenue. That would suggest leverage in the business model. Instead, we have the opposite.
  • To be fair, increased investment is at least partially responsible for shrinking gross margins, and investments can take years to pay off. PetroChina may very well be doing exactly what it's supposed to be doing.
  • If so, rising receivables could indicate a river of new revenue. And if PetroChina's investments don't pay off? Look out below.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

China Integrated Energy (Nasdaq: CBEH  ) 109.3%
China Petroleum & Chemical (NYSE: SNP  ) (2.2%)
CNOOC (NYSE: CEO  ) 13.3%
PetroChina (5.1%)
Sinopec Shanghai Petrochemical (NYSE: SHI  ) (3.3%)

Source: Capital IQ. Data current as of Sept. 30.

Of the stocks in this table, only China Integrated Energy and CNOOC come out looking good. But that may not matter. PetroChina is positioning itself for a longer-term growth opportunity, and historically, management has a record for investing capital well.

Grade: Unsustainable
I think it's too early to call this a sustainable growth opportunity, but I also don't see much downside risk. PetroChina has invested well in the past, and it's operating with a government mandate to increase oil reserves. To me, that sounds like a stock that deserves to trade for more than just 13 times earnings. As such, I'm willing to take a chance and go long the stock in my CAPS portfolio.

Now it's your turn to weigh in. Do you like PetroChina at these levels? Let the debate begin in the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring PetroChina:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

CNOOC is a Motley Fool Global Gains recommendation. Total S.A. is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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