In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
On Friday, we met our strongest challenger to date -- and turned the iFruit into Apple
By this stage of the tournament, you all probably know Chesapeake's advantages by heart. But because they're central to today's argument, I'll run them down quickly just one last time. One of the top three independent oil and gas firms in the U.S., Chesapeake:
- Sells for approximately $0.60 per dollar of intrinsic value.
- Holds 9 trillion cubic feet-equivalent of proven natural gas reserves, with nearly twice that amount of as-yet unproven reserves.
- Has spent billions of dollars buying up high-quality natural gas assets.
- Is now poised to monetize those investments, creating profits for its current and new investors.
With domestic U.S. gas supplies on the decline but demand for clean-burning fuels on the rise, gas prices have nowhere to go but up. Even a nationwide recession could at worst dampen demand temporarily -- it cannot repeal the laws of supply and demand. Thanks to fears of terrorism and general N.I.M.B.Y. sentiment along the U.S. coastal states, it seems unlikely we'll ever build sufficient liquefied natural gas terminals to import our way out of this trend. As a result, domestic gas producers like Chesapeake have a lock on those future profits.
Recognizing the trends -- and being in a position to see them better than anyone else -- CEO Aubrey McClendon has spent enormous sums buying Chesapeake stock. Over the past 18 months, he's invested $165 million of his own money, buying Chesapeake shares hand over fist. In fact, he bought another $6.1 million worth of shares just last week. Want to invest alongside a CEO who "eats his own cooking"? That's McClendon.
But why does Chesapeake win?
That's the $64,000 question. And here's your answer. Chesapeake beats Sasol as an investment for three reasons: Chesapeake is cheaper. It's more profitable. And it's growing faster.
With a trailing price-to-earnings ratio (P/E) of just over seven, Chesapeake shares change hands for roughly half the price of Sasol's 13.8 P/E.
Chesapeake boasts an operating margin of 48.2%, versus Sasol's tidy, but inferior, 30.9%. On the bottom line, Chesapeake nets a whopping 27.3% profit out of every dollar of revenue it takes in. That's nearly twice Sasol's 15.7% net.
Over the last five years, Chesapeake's business has been on a tear. Sales are up an astounding 656%. Profits grew even faster, up 823%. In comparison to Sasol -- well, there just is no comparison. The staid old South African concern has grown its sales 130% in five years' time and its profits 196%.
And what's happened historically looks likely to continue in the future. Looking forward, analysts expect Sasol to do no better than it's done in the past and to continue growing at just 12% per year over the next five years. And Cheseapeake? It wins again, with 15% projected growth.
Long story short, Sasol may be a fine company and a steady grower. But if you're looking to invest in a bargain-priced, profitable, fast-growing business, then you should do exactly what Chesapeake's CEO is doing -- and buy Chesapeake. Vote the stock "outperform" and help propel it to the top. (Disagree? Vote it "underperform.")
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Microsoft and Chesapeake are Motley Fool Inside Value picks. Sasol is a Motley Fool Global Gains pick. So before buying, do your homework, and review The Motley Fool's superbly sportsmanlike disclosure policy.