Devonian energy (dvn – Free Report) is one of the most followed stocks by Zacks.com visitors lately. As such, it might be a good idea to review some of the factors that could impact the stock’s near-term performance.
Over the past month, shares of this oil and gas exploration company have returned -25.8%, compared to a -4.3% change in the Zacks S&P 500 Composite. During that period, the Zacks Oil and Gas – Exploration and Production – United States industry, which includes Devon Energy, is down 15.9%. The crucial question now is: What could the future direction of the stock be?
While news releases or rumors of a material change in a company’s business prospects will usually “trend” the stock and result in an immediate price change, there are always some basic facts that ultimately drive the buy-and-hold decision.
Revisions to earnings estimates
Rather than focusing on anything else, at Zacks we prioritize assessing the change in a company’s earnings outlook. This is because we believe the fair value of its stock is determined by the present value of its future income streams.
Essentially, our analysis is based on how sell-side analysts who cover the stock revise their earnings estimates to reflect the latest business trends. As earnings estimates for a company increase, so does the fair value of its stock. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, causing its price to move higher. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Devon Energy is expected to report earnings of $2.29 per share for the current quarter, a +281.7% year-over-year change. In the last 30 days, the Zacks consensus estimate has changed by +0.6%.
Consensus earnings estimate of $9.10 for the current fiscal year indicates a change of +157.8% year-on-year. This estimate has changed by +3.8% in the last 30 days.
For the next fiscal year, the consensus earnings estimate of $9.92 shows a +9% change from what Devon Energy was expected to report a year ago. Over the past month, the estimate has changed by +7.1%.
With an impressive, third-party audited track record, our proprietary stock ranking tool – the Zacks Rank – is a more meaningful indicator of a stock’s short-term price performance by effectively harnessing the power of earnings estimate revisions. The magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates, has resulted in a Zacks #3 rank (hold) for Devon Energy.
The chart below shows the development of the company’s 12-month consensus EPS estimate:
12 Month EPS
Sales Growth Forecast
While a company’s earnings growth is arguably the best indicator of its financial health, not much happens if it can’t grow its revenue. It’s almost impossible for a company to grow its profits without increasing its revenue over long periods of time. Therefore, knowing a company’s potential revenue growth is crucial.
For Devon Energy, the consensus revenue estimate for the current quarter of $4.67 billion indicates a +93.1% year-over-year change. For the current and next fiscal year, estimates of USD 18.46 billion and USD 18.7 billion indicate changes of +54.9% and +1.3%, respectively.
Latest reported results and surprise history
Devon Energy reported revenue of $3.81 billion for the most recent reported quarter, a +116.4% year-over-year change. EPS of $1.88 for the same period compared to $0.45 a year ago.
Compared to the Zacks Consensus estimate of $4.02 billion, reported earnings represent a surprise of -5.12%. EPS surprise was +8.05%.
The company beat consensus estimates for earnings per share in each of the last four quarters. The company topped consensus estimates for sales three times during that period.
No investment decision can be efficient without considering a stock’s valuation. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a significant factor in future stock price performance.
Comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values will help determine if the stock is fair valued, overvalued or undervalued. Comparing the company versus its peers using these parameters gives a good sense of the reasonableness of the stock price.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which assesses both traditional and unconventional valuation metrics) organizes stocks into five groups from A to F (A is better than B; B is better than C; and so on), making it helpful in determining whether a stock is overvalued, correctly valued, or temporarily undervalued.
Devon Energy is rated B on this front, indicating it is trading at a discount to its peers. Click here to view the values of some of the assessment metrics that led to this grade.
The facts discussed here and plenty of other information on Zacks.com could help determine whether or not the Devon Energy market clamor is worth paying attention to. However, its No. 3 Zacks rank suggests that it could move in line with the broader market in the near future.