Value investing is one of the top ways long-term investors can profit. It's not always easy to identify undervalued stocks but astute investors are always hunting to find a company whose stock is currently inexpensive.
In my search, I have come across an undervalued energy stock that I think currently has an attractive valuation: Chesapeake Energy (CHK).
From fundamentals to future outlook, analysts remain confident that Chesapeake stock is undervalued and will see price appreciation in the not-too-distant future.
Shares of Chesapeake stock are currently down 23% from 52-week highs. Yet in the last three months after hitting 52-week lows, shares of the stock are back up 19%. So let's look at what's been happening during those three months, and why Chesapeake stock still holds value for today's investor.
Valuation and Free Cash Flow
Chesapeake stock currently offers investors several key fundamentals that have hit value territory. The stock trades at 1.7 times earnings over the last twelve months. Over the last five years, the average price-to-earnings ratio has come in at 4.91 times earnings, making today's 1.7 times earnings well under historical multiples. But that's not the only valuable piece of information the oil and gas provider offers.
Chesapeake stock also has strong book value as well, with the stock holding 1.07 times book value as of writing. Again, the current multiple of 1.06 times book value comes in a bit lower than the 1.69 average over the last five years. Added to this is the company's debt. As of writing, the company holds a debt-to-equity ratio at 0.198, falling far short of the average at 0.4017 median over the last five years as well.
However, fundamentals don't paint an entire picture of why Chesapeake stock is a value stock at this point. After all, the market doesn't react the way we want it to just because we see undervalued levels.
That being said, the company has seen an absurd increase in its free cash flow over the last few years. During its first-quarter earnings release, Chesapeake management stated the company delivered $241 million in free cash flow. This continues to be on the rise, showing that the company continues to be able to achieve sustainable free cash flow. Therefore, investors could be on the lookout for more share buybacks or dividend increases in the future. Keep that up, and Chesapeake stock should perhaps gain more interest in the near future from investors.
Part of this certainly comes from the recent sale of its Eagle Ford assets, which have closed $2.8 billion in sales year-to-date, as of the first quarter earnings report. This influx of cash is only planned to increase as management looks to sell of its remaining stake. That's also on top of the $1.4 billion sold back in February of its shale oil assets.
Analysts approve of natural gas shift
Analysts remain positive about the performance of Chesapeake stock, with a consensus of Moderate Buy. Broken down, this came to nine analysts recommending a strong buy, one as a moderate buy, and five as a hold. Those believing the company has a strong future look to the strong performance of natural gas in the current market. At spot energy prices, strong companies like Chesapeake stock deliver about $20 in free cash flow for every $100 invested. Analysts believe the stock can continue delivering attractive returns, and CHK currently has mean price target of $110.14. That would mean a potential upside of about 36% as of writing. And it's quite possible that this price will continue to climb as analysts rerate the stock.
Today is the first day of summer and National Oceanic and Atmospheric Administration (NOAA) predicts most of the U.S. will see above temperatures in the next few months. Natural gas prices often rise in hotter than normal temperatures because of demand from electricity providers to power increased air conditioning usage. Currently, natural gas prices are trading near 1-month highs.
Demand is expected to continue remaining strong as hotter weather and a reduction in domestic output continues. This is why Chesapeake stock is therefore such a strong choice right now. The stock has about 90% of its output made up of natural gas, with over 15 years of inventory, spread across 2,200 locations. Any natural gas price increases will therefore be incredibly beneficial to the stock in the near term.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
