Is Pengrowth Energy's Stock Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Pengrowth Energy (NYSE: PGH  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Pengrowth's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Pengrowth's key statistics:

PGH Total Return Price Chart

PGH Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

16%

Fail

Improving profit margin

(161.2%)

Fail

Free cash flow growth > Net income growth

(99.3%) vs. (120.2%)

Pass

Improving EPS

(110.6%)

Fail

Stock growth (+ 15%) < EPS growth

(42%) vs. (110.6%)

Fail

Source: YCharts. * Period begins at end of Q1 2010.

PGH Return on Equity Chart

PGH Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(112%)

Fail

Declining debt to equity

9.1%

Fail

Dividend growth > 25%

(42.6%)

Fail

Free cash flow payout ratio < 50%

9,266% 

Fail

Source: YCharts. * Period begins at end of Q1 2010.

How we got here, and where we're going
This is rather ugly performance, as Pengrowth musters a single passing grade only because of a numeric technicality. Sure, free cash flow hasn't declined as fast as net income, but neither result is looking good lately. Pengrowth hasn't had a great time since converting to corporate status as a result of Canadian legal changes to the tax treatment of royalty trusts. Its dividend remains quite high, but that hasn't been enough to stave off big losses for long-term shareholders. Is a rebound on the horizon, or is this high-yielder flashing the ominous value trap signals for the foreseeable future?

The rebound may have already happened. In fact, Pengrowth's shares are up 23% since my fellow Fool singled out the company as a potential low-priced value play back in January. Sean liked Pengrowth's laser focus on the Lindbergh bitumen project, and its efforts to divest non-core assets, which could turn around flagging metrics and make Pengrowth a smaller, but more profitable, Canadian oil play. Pengrowth made earlier efforts to play with oil's big boys in the Alberta shale -- Devon Energy (NYSE: DVN  ) and ExxonMobil (NYSE: XOM  ) already have major holdings in the region, and Pengrowth picked up a smaller driller a year ago to compete.

One thing investors need to watch is Pengrowth's sky-high payout ratio, which, at present levels, is clearly unsustainable. Pengrowth's asset sales will help paper over the shortfall in the near term, but it's not good policy to pay out so much in the middle of a major exploration project. The company has no plans to cut its dividend, in spite of anticipated production declines in the near term, which stands in stark contrast to competitor Penn West (NYSE: PWE  ) , which slashed its dividend by nearly half in a wide-ranging announcement earlier this week. Both Pengrowth and Penn West trade at substantial discounts to book value, but at least Pengrowth's monster dividend gives investors something more substantial while waiting for big exploration projects to bear fruit. However, given the company's multi-year weakness, it will take a strong stomach, and a very firm belief in Pengrowth's prospects, to jump in today.

Putting the pieces together
Today, Pengrowth has few of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.

Keep track of Pengrowth Energy by adding it to your free stock Watchlist.


Read/Post Comments (2) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 07, 2013, at 7:52 PM, OnTheContrary wrote:

    This is a typically superficial and inappropriate bean counter analysis of a small company in transition that pays no attention to the

    actual business prospects of this company, its corporate culture, or it's management track record. It is a good example of the fallacy of

    statistic hindsight, and economic modeling in which simplistic straight line extrapolations of the past are projected into the future as though

    nothing about the business or its fundamentals was subject to change.

    In fact, management has already guided Pengrowth successfully through two monumental changes: the first, when this former "CanRoy" with its

    well-established philosophy of passing most profits through to its unit holders was suddenly, out of the blue, forced by the Canadian

    government to change itself into a taxable corporation. The other was the collapse of natural gas prices which wiped out (for the indefinite

    future at least) about a third of the company's assets. Yet except for a quarter or two PGH has remained profitable enough to sustain the

    generous dividend that is its hallmark and its raison d'etre, and now (as of the end of last year), management has put into motion a plan to

    completely restructure the company's principal revenue producing assets around the Lindbergh bitumin project, for the explicit purpose of being

    able to maintain the current 9% dividend indefinitely at the present level, unless energy prices decline precipitously from here.

    Anyone interested in this company should pass over uninformed drivel like this and read, as an introduction, Albert Alfonso's January 15th

    article at Seeking Alpha

    http://seekingalpha.com/article/1111661-pengrowth-energy-goe...

    and then dig into the company's 2012 annual report

    http://www.pengrowth.com/assets/reports/2012-Pengrowth-Annua...

    and the May 1 Q1 report

    http://finance.yahoo.com/news/pengrowth-reaffirms-full-guida...

    that shows that PGH is already ahead of the curve on its strategy.

    In the worst case I can imagine, short of the world sinking into a prolonged depression, I expect that the dividend will be maintained in the

    5-10% range, and if management is wholly successful in their strategy the stock is an easy double in the next couple of years.

  • Report this Comment On June 17, 2013, at 5:36 PM, BrianMcM wrote:

    I agree with the comment by "On the Contrary". I own both PGH and PWE. Neither lend themselves to traditional analysis for the reasons given. In fact, I find backwards looking fundamental analysis to be dangerous for the investor of even larger, more straight forward companies. This type of numeric analysis depends on extrapolation of historic trends. Nothing can be more dangerous, especially when markets become overheated and artificially valued, as this one currently is. I would much rather get on board with beaten down companies with a blown story, but with excellent long term prospects. Buying at the bottom is how to make money in the markets, not jumping on a rocket ship with a vertical trajectory just before it falls back to earth.

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