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:
