SM Energy (SM) recently made it onto Zacks.com's list of Most Searched Stocks, therefore, it may be advisable to consider some key factors that could impact this stock's performance in the near future.
Over the past month, shares of this independent oil and gas company have risen +1.5% versus a +3.2% gain for the Zacks S&P 500 Composite Index. During that same period, the Zacks Oil & Gas – Exploration & Production – United States industry, which SM Energy belongs to, has fallen 2.4%. The big question here is, what is the direction of this stock going forward?
While media reports or rumors of major changes in a company's business prospects usually influence the movement of that company's share price, leading to immediate price movements, there are always certain fundamental factors that ultimately drive a buy-and-hold decision.
Earnings forecast revision
At Zacks, we evaluate changes in a company's future earnings estimates above all else because we believe the present value of future earnings streams determines the fair value of a stock.
It essentially looks at how sell-side analysts covering the stock are revising their earnings forecasts to reflect the impact of the latest business trends. As a company's earnings forecasts rise, so does the fair value of its stock. If the fair value is higher than the current market price, investors will be interested in buying the stock, driving the share price up. This is why empirical studies have shown a strong correlation between trends in earnings forecast revisions and short-term stock price movements.
For the current quarter, SM Energy is projected to post earnings of $1.78 per share, which would represent a +2.9% change from the year-ago period. The Zacks Consensus Estimate has changed -5.2% within the past 30 days.
The consensus earnings estimate for the current fiscal year is $7.57, indicating a change of +28.5% year over year. Over the past 30 days, this estimate has changed +6.7%.
Looking at the next fiscal year, the consensus earnings estimate is $9.50, which represents a +25.6% change from what SM Energy was expected to report a year ago. Over the past month, estimates have changed by +4.5%.
The Zacks Rank, our proprietary stock rating tool with a strong outside-audited track record, effectively harnesses the power of earnings estimate revisions to provide a more certainty view into near-term stock price direction. The magnitude of the recent change in consensus estimates, along with three other factors related to earnings estimates, have earned SM Energy a Zacks Rank #1 (Strong Buy).
The story continues
The chart below shows the evolution of the company's consensus EPS estimates over the next 12 months.
12 Month EPS
Projected Revenue Growth
A company's earnings growth is arguably the best indicator of a company's financial health, but nothing happens if the company can't grow earnings. It's nearly impossible for a company to grow its earnings without growing its revenue over the long term. Therefore, knowing a company's earnings growth potential is very important.
For SM Energy, the consensus revenue estimate for the current quarter is $697.38 million, indicating a change of +8.8% year-over-year. For the current and next fiscal years, estimates of $2.84 billion and $3.5 billion indicate changes of +19.5% and +23.3%, respectively.
Last reported results and surprise history
SM Energy reported revenue of $634.56 million for its most recent quarter, up 15.2% from the same period last year. EPS for the quarter was $1.85, up from $1.28 in the same period last year.
Compared to the Zacks Consensus Estimate of $629.58 million, reported revenues represented a surprise of +0.79%. EPS surprise was +17.83%.
The company has beaten consensus EPS estimates in each of the last four quarters, and revenue has surpassed consensus estimates two times during that period.
evaluation
No investment decision can be made efficiently without taking into account stock valuation. Whether a stock's current price properly reflects the intrinsic value of its business and the company's growth prospects is a key factor in determining future stock price movements.
Comparing the current value of a company's valuation multiples such as Price to Earnings (P/E), Price to Sales (P/S), Price to Cash Flow (P/CF) with its historical values helps in identifying whether the stock is fairly valued, overvalued or undervalued. Also, comparing a company with its peers based on these parameters gives a good idea of how reasonably priced its stock is.
The Zacks Value Style Score (part of the Zacks Style Scores system) pays close attention to both traditional and non-traditional valuation criteria to rate stocks from A to F (with An being better than B, B being better than C, etc.), which can be very helpful in identifying whether stocks are overvalued, fairly valued or temporarily undervalued.
SM Energy has an A rating in this regard, indicating that it is trading at a discount relative to its industry peers. Click here to see the values of the valuation metrics that drove this rating.
Conclusion
The facts discussed here, and many other information on Zacks.com, may help you decide whether the market buzz surrounding SM Energy is worth following, however, the company's Zacks Rank #1 suggests that the company is likely to outperform the overall market in the near term.
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