Fundamental Analysis: Chesapeake Energy Corp. (NYSE:CHK)

Operations Diagnostic

CHK-US has relatively low profit margins and median asset efficiency.

The company’s profit margins are below peer median (currently -5.7% vs. peer median of 9.9%) while its asset efficiency is about median (asset turns of 0.2x compared to peer median of 0.2x).
Fundamental Analysis: Chesapeake Energy Corp. (NYSE:CHK)

CHK-US has moved to a relatively low net margin from a relatively high net margin profile at the recent year-end.

CHK-US’s net margin continues to trend downward and is below (but within one standard deviation of) its five-year average net margin of -2.8%. The decrease in its net margin to -5.7% from 16.6% (in 2011) was also accompanied by a decrease in its peer median during this period to 9.9% from 12.4%. Net margin fell 19.7 percentage points relative to peers (and is now also lower than its peer median).
CHK-US’s asset turnover is downward trending and is now similar to its five-year average asset turnover of 0.3. Though its asset turnover has remained relatively stable at 0.2 compared to 2011, its peer median has decreased to 0.2 from 0.3 during this period. Overall, asset turnover and net margin trends suggest that CHK-US’s ROA at -1.4% has maintained its downward trend and is below (but within one standard deviation of) its five-year average ROA of -0.1%.
Net Margin% for Chesapeake Energy Corp. (NYSE:CHK)
Graph of Sales/Total Assets showing Peer Median (TTM) for Chesapeake Energy Corp. (NYSE:CHK)

Earnings Leverage

Lagging revenues and earnings imply a lack of strategic focus and/or ability to execute.

Changes in the company’s annual top line and earnings (12.0% and -1.8% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.
Earnings Leverage Earnings Growth % vs. Revenue Growth % charted with respect to peers for Chesapeake Energy Corp. (NYSE:CHK)

Sustainability of Returns

CHK-US’s relative returns suggest that the company has operating challenges.

CHK-US’s return on assets is less than its peer median currently (-1.4% vs. peer median 2.6%). It has also had less than peer median returns on assets over the past five years (-0.06% vs. peer median 3.5%). This performance suggests that the company has persistent operating challenges relative to peers.
Sustainability of Returns or 5 year average ROA% vs. Latest ROA% charted with respect to peers for Chesapeake Energy Corp. (NYSE:CHK)

Drivers of Margin

Relatively low margins suggest a non-differentiated product portfolio and not much control on operating costs.

The company’s comparatively low gross margin of 36.9% versus peer median of 66.0% suggests that it has a non-differentiated strategy or is in a pricing constrained position. In addition, CHK-US’s bottom-line operating performance is below peer median (pre-tax margins of -7.6% compared to peer median 16.6%) suggesting relatively high operating costs.
Drivers of Margin or Gross Margin% vs. Pre Tax Margin % charted with respect to Peers for Chesapeake Energy Corp. (NYSE:CHK)

CHK-US has moved to a Commodity/High Cost from a Commodity/Low Cost profile at the recent year-end.

CHK-US’s gross margin is its lowest relative to the last five years and compares to a high of 61.2% in 2007. The decrease in its gross margin to 36.9% from 38.6% (in 2011) was also accompanied by a decrease in its peer median during this period to 66.0% from 73.9%. Gross margin rose 6.2 percentage points relative to peers.
CHK-US’s pre-tax margin is downward trending and is below (but within one standard deviation of) its five-year average pre-tax margin of -4.2%. Like the gross margin trend, the decrease in its pre-tax margin (to -7.6% from 26.0%) was also accompanied by a decrease in its peer median during this period (to 16.6% from 19.3%). Relative to peers, pre-tax margin fell 30.9 percentage points (and is now also lower than its peer median).
Drivers of Margin or Gross Margin% vs. Pre Tax Margin % charted with respect to Peers
Chart of Pre Tax Margin % showing Peer Median (TTM) for Chesapeake Energy Corp. (NYSE:CHK)

Growth Expectations

The company’s earnings may be peaking.

While CHK-US’s revenues growth has been above the peer median (-1.1% vs. -1.6% respectively for the past three years), the stock’s Price/EBITDA ratio of 3.7 is less than the peer median (Note: We use Price/EBITDA instead of PE due to negative earnings). This implies that the company’s earnings are peaking and the market expects a decline in its growth expectations.
Growth Expectations or 3 Year Revenue Growth % vs. P/E charted with respect to peers for Chesapeake Energy Corp. (NYSE:CHK)