Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap W&T Offshore (NYSE: WTI) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

W&T has a P/E ratio of 8.3 and an EV/FCF ratio of 6.8 over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, W&T has a negative P/E ratio and a five-year EV/FCF ratio of 15.0.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

W&T has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 


1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

W&T Offshore 8.3 6.8 NM 15.0
Abraxas Petroleum (Nasdaq: AXAS) 47.8 NM 308.7 NM
ATP Oil & Gas (Nasdaq: ATPG) NM NM 4,483.4 NM
Forest Oil (NYSE: FST) 16.3 NM NM NM

Source: Capital IQ, a division of Standard & Poor's; NM = not meaningful.

Numerically, we've seen how W&T's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, W&T's net income margin has ranged from -203.1% to 30.8%. In that same time frame, unlevered free cash flow margin has ranged from -86.9% to 39.1%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; margin ranges are combined.

Additionally, over the last five years, W&T has tallied up four years of positive earnings and three years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Usually, we'd look at the growth rates analysts expect for W&T and its competitors, but there aren't any analyst estimates reported for W&T. However, we can at least see what it's done over the past five years. In that time period, W&T has put up EPS growth rates of -4.2%.

Here's how W&T compares to its peers for trailing five-year growth (because of losses, ATP's growth rate isn't meaningful):

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of W&T are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at an 8.3 P/E ratio, but this is just a start. If you find W&T Offshore's numbers or story compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you. You can start with this bump in the road from last month and then take a look at the quality of W&T's assets.

Interested in reading more about any of these stocks? Add them to My Watchlist to find all of our Foolish analysis. And for more stock ideas, check out this recent article: 34 Expert Analysts Uncover Outstanding Dividend Plays.

Anand Chokkavelu owns shares of ATP Oil & Gas. W&T Offshore is a Motley Fool Hidden Gems choice. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.