All investors have to ask one question before they add a stock to their portfolio: "Is this a good buy today?" Well, today we'll take a closer look at one company that has many would-be investors asking this very important question. Let's see if SandRidge Energy
Tracking the trends
One way to find out how the market views SandRidge is to look at its stock performance as compared to its key metrics, like revenue, net income, and free cash flow. Is SandRidge's price responding to its earnings, or is there a discrepancy that we might be able to take advantage of?
SD Total Return Price data by YCharts.
Net income has improved substantially after bottoming out in 2010, and has now outpaced the growth in SandRidge's revenue, but it looks like free cash flow has yet to turn positive. Is negative free cash flow the reason the market's been avoiding SandRidge for the past few years? Let's dig a little deeper.
5-Year Annualized Change
|Stock total return (5 years)||(80.3%)||(27.7%)|
|TTM revenue||$1.60 billion||18.7%|
|TTM gross profit||$1.07 billion||21.0%|
|TTM net income||$805 million||74.3%|
|TTM free cash flow||($1.37 billion)||N/M|
|Total debt||$3.56 billion||27.2%|
Sources: Morningstar and YCharts. TTM = trailing-12-month. N/M = not material because of negative results throughout.
SandRidge has undergone a major turnaround over the past five years. Fool contributor Arjun Sreekumar has a great write-up on SandRidge's past and future, from its early days as a nat-gas-focused driller in Texas to its current incarnation as a fairly conventional oil exploration and production company. As a relatively young upstart, SandRidge has to spend copious amounts on capital expenditures, which explains both the consistently negative free cash flow and the steady growth of its debt.
That doesn't fully explain why its price has languished while its bottom line has grown. The market may not expect SandRidge to become a cash cow in the future, despite the strong improvement in net income. We'll find out if that's the case in just a moment.
Now that we've gotten a look at SandRidge's past, let's see what its future might hold. We've got plenty of opinions from Wall Street, but it's also worth looking at The Motley Fool's CAPS rating of this company and its own anticipated guidance.
|Upcoming quarter||$532 million revenue, $0.01 EPS|
|Full year (2012)||$1.96 billion revenue, $0.12 EPS|
|Next year (2013)||$2.55 billion revenue, $0.17 EPS|
|Full-year (2012) sales growth||38.8%|
|Full-year (2012) EPS growth||1,300%|
|Five-year annualized forward growth||218.1%|
|Latest full-year corporate guidance||33.0 million barrels of oil equivalent|
|Motley Fool CAPS rating (out of 5) and % outperform||**** (96.4% outperform)|
Source:s Yahoo! Finance, company press release, and Motley Fool CAPS.
Here we have to stop and scratch our heads. Analysts expect triple-digit earnings growth going forward, but its stock has languished. Part of that can be blamed on SandRidge's dilutive offerings over the past five years, which have increased shares outstanding by nearly 350%:
SD Shares Outstanding data by YCharts.
SandRidge has also been busy spinning off its assets into publicly held trusts in the last few years. That's helped fund its operations, but it's also kept its book and enterprise values from growing as it builds out operations. Chesapeake Energy
SD Book Value data by YCharts.
SandRidge's three trusts, SandRidge Mississippian Trust I
Putting it together
Today, SandRidge is focused on expanding its drilling efforts, and has set its sights on the two basins for which its trusts are named. The company also acquired a small shallow-water offshore driller earlier this year. It appears to have a bright future ahead in spite of its substantial debts, with more to come -- $1.6 billion in new senior notes were offered or announced just last week.
As long as earnings continue to grow rapidly, and no further share dilutions or royalty trusts are planned, that debt should be manageable. It's hard to see the price of oil dropping significantly as long as the rest of the world continues to industrialize. Still, those are big ifs. I wouldn't make SandRidge a portfolio cornerstone, but you might be ahead of a steeply rising curve if you decide to jump in now.
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The Motley Fool owns shares of Chesapeake Energy and SandRidge Mississippian Trust II. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.