As an exercise, I am attempting to value GFS.TO. The company has negative FCF since listing, but the numbers are improving. EBITDA is negative over the last two years. Consensus analyst price target is around $2.00, BVPS is about $3.00. Things improved over Q1 hence why the stock has ticked up a bit lately.
Because FCF is negative, I don't see how I can forecast the future with any accuracy, so DCF isn't feasible. Obviously any company trading below BV has "value," but might never reach it. I don't know of any major reasons why it wouldn't (no lawsuits, debt issues, regulatory, etc.), so it's a matter of the market noticing, I think.
Based on all this, why would analyst price targets be in the $2.00 range, versus the $3.00 range - how do equity analysts price this type of stock? Could it be that they're actually pricing in the possibility that the company doesn't continue to improve, but doesn't fail, just goes on with the current ratios, and the market takes a few years to notice, so the price target is a discounted BVPS?
Insight into how analysts think in this case is appreciated.
It's an art for a reason. Multiple analysts may have a target of $2/share, but arrived at that valuation for different reasons.
Just because the stock is trading below book value, doesn't mean it cannot continue to do so in the near-term. Obviously, over the long-term, one would expect it to trade at or above BVPS, but 12-mo out isn't a long-term forecast.
Others probably have more insight, but stocks trade off of a variety of metrics. No doubt cash is generally king, hence the preference for FCF & EBITDA (proxy for FCF). But, certain stocks or industries are valued more using revenue or industry-related metrics.
Given the fact that this is a pure energy play, I would guess EV/Reserves or EV/EBITDAX.
Thanks for the reply. I'm actually doing the analysis as part of a few small ones that I am including with applications to research depts. I'm going to go with my BVPS calc. I'm more focused on making a call on direction versus a target price anyway. "Speculative buy."
For what it's worth, this is a service company, not E&P, so there are no reserves or exploration expense.
Ok, makes sense. Didn't look closely enough at it. Thought the name was a giveaway.
It could trade below book value indefinitely if the market does not believe the book value is attainable. If they actually tried to sell all of their assets, would they be able to realize true market value for their assets? In many cases it is a buyer's market and the answer is no
True. I suppose this further makes the analysis a guess... take BV, deduct some sort of allowance. Hard to know. Quite speculative.
Can't you forecast the future cashflows. I mean you can forecast the revenue and the costs, so it is possible to get a positive dcf value from that. Otherwise make a liquidation value or value based on some sales multiples?
Anyone who has looked at o&g service names over the past 2 years and hasn't lived under a rock knows that the value of the assets on the book aren't worth that much. At least one company that I reviewed tried to sell some servicing assets but gave up because they couldn't find "reasonable pricing" on it. The reason is related to the oversupply of gas equipment relative to current number of rigs. The last time I spoke w/ people they said est. 20% oversupply... but this was at least a few months ago. This is for the US and I think Canada was in a worse spot.
That being said, I probably wouldn't expect you to know this given you are taking what seems to be an initial look and haven't been actively following this specific part of the market. It also seems like you're in school(?)
In terms of how to value... you'd probably have to look a couple of years out. Above posters have given reasonable ways to value it.
I'll look into trying to forecast revenues and costs based on the few recent quarters that have been decent. The company has been pretty volatile though. I'd still love to understand how the professionals are doing it, given how little history of success there is. I listened to the most recent earnings call today and there weren't any bank analysts asking questions... just a few PWMs and retail investors. I think that tells you something about how seriously the market takes the company, maybe.
Thanks for this. Makes great sense given the state of the industry as a whole - I know that Calfrac has been sending crews from Alberta all the way to PA. I suppose this is because they've reduced their staffing in the face of decreased business.
I'm not in school, actually a few years out, but trying to make a career transition, and taking the advice I've received from a few analysts I know.
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