This week we take a look at Chesapeake Energy Corporation (NYSE:CHK) starting today with an analysis of the company’s fundamentals. Our analysis later this week will cover our assessment of its likely Corporate Actions, Dividend Quality, and Earnings Quality.
For details on how CapitalCube computes the Fundamental Analysis Score of a company read here. Our analysis is peer-based; we used the following peer set for analyzing Chesapeake: Anadarko Petroleum Corporation (NYSE:APC), EOG Resources, Inc. (NYSE:EOG), Apache Corporation (NYSE:APA), Devon Energy Corporation (NYSE:DVN), Williams Companies, Inc. (NYSE:WMB), Noble Energy, Inc. (NYSE:NBL), Hess Corp. (NYSE:HES) and EQT Corporation (NYSE:EQT).
If you are logged-in then you can change the default peer set (shown on the right) by either adding a new peer in the circled box or deleting any peers you don’t want by simply removing the checked peers. When you re-run the analysis Chesapeake will be scored and analyzed with your new custom peer set.
- Chesapeake Energy Corp. trades at a lower Price/Book multiple (0.9) than its peer median (1.8).
- CHK-US looks challenged given its below median EBITDA-based returns and the market’s low expectations of its growth.
- CHK-US has relatively low profit margins and median asset efficiency.
- Compared with its chosen peers, the company’s annual revenues and earnings change at a slower rate, implying a lack of strategic focus and/or lack of execution success.
- CHK-US’s return on assets currently and over the past five years has trailed the peer median and suggests the company might be operationally challenged relative to its peers.
- The company’s relatively low gross and pre-tax margins suggest a non-differentiated product portfolio and not much control on operating costs relative to peers.
- While CHK-US’s revenue growth in recent years has been above the peer median, the stock’s Price/EBITDA ratio is less than the peer median suggesting that the company’s earnings may be peaking and the market expects a decline in its growth expectations.
- The company’s relatively low level of capital investment and below peer median returns on capital suggest that the company is in maintenance mode.
- CHK-US’s operating performance may not allow it to raise additional debt.
Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.
Share Price Performance
Relative underperformance over the last year and the last month suggest a lagging position.
CHK-US’s share price performance of -24.7% for the last 12 months is below its peer median. The 30-day trend in its share price performance of -1.5% is also below the peer median implying that the company’s stock performance is lagging its peers.
Drivers of Valuation: Operations or Expectations?
Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)
Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.
Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?
CHK-US has a challenged profile relative to peers.
CHK-US’s PE multiple is negative now so EBITDA ratios provide better peer comparisons. CHK-US’s performance looks relatively challenged because of its below median returns (EBITDA return on equity of 22.8% compared to the peer median of 33.5%) and the market’s relatively low expectations of its growth (Price to Ebitda multiple of 3.7 compared to peer median of 5.3). The company trades at a lower Price/Book multiple of 0.9 compared to its peer median of 1.8.