The company is a rapidly growing energy producer which operates strictly onshore in the continental US. Over the past several quarters, its earnings have been rapidly improving as SM Energy Co. (NYSE:SM) dramatically increased production.
Over the next few quarters, analysts and investors will be forced to incorporate accelerating growth expectations for this company. As a result, demand for the stock will increase, and I expect the stock price to trade up to a target of $94.50 per share.
Picking up shares of this stock today will give investors a great shot at generating profits of 50%.
Record production boosts expectations
In the first quarter of 2013, SM Energy Co. (NYSE:SM) produced a record 10.3 million barrels of oil equivalent (MMBOE), which was at the top end of management’s guidance.
As part of the company’s Q1 report, management issued guidance for further growth in the second quarter and throughout the year. For the second quarter, management expects to produce 10.5 to 11.0 MMBOE, and for the full year SM Energy should produce 42.8 to 44.5 MMBOE.
With natural-gas prices still relatively low, SM Energy Co. (NYSE:SM) will focus on increasing production of its liquids portfolio. This makes sense given the current energy pricing environment, and also saves the company’s natural-gas assets for future periods when natural-gas pricing improves.
As I mentioned in my Anadarko Petroleum article, natural-gas pricing is expected to increase as the Department of Energy shifts its stance on liquid natural gas (LNG) export facilities. Over the next few years, the new export policy should boost US natural-gas prices, which in turn will benefit producers like SM Energy.
As a result of the strong first-quarter performance, analysts are increasing their estimates for SM Energy Co. (NYSE:SM), as you can see in the table below.
A dramatic increase in analyst expectations can be very positive for a company’s stock-price performance. This dynamic indicates that investors are behind the curve in terms of assessing a company’s growth prospects and as new data is evaluated, demand for the stock can increase significantly.
As SM Energy Co. (NYSE:SM) increases production, analysts are now expecting the company to earn $3.10 in 2013 followed by a 22% increase in earnings to $3.78 in 2014. It is reasonable to expect the estimates to continue to increase as new information is analyzed, but we’ll use the 2014 estimate of $3.78 to be conservative.
With the company growing earnings at a 22% annual rate, investors should be willing to pay at least 20 times earnings for this growth opportunity. (Investors are currently paying more than 20 times 2013 earnings for the stock, so this valuation seems more than reasonable.)
This leads to an expected stock price of $94.50 (20 times earnings of $3.78), which should be reached sometime in the next 12 months. This represents a gain of 50% from the current stock price, and may wind up being a very conservative expectation.
