Investment Jungle

Another stock that was identified by Mr. Beantown as a potential Rule #1 stock is XTO Energy Inc. which trades on the NYSE under the symbol XTO. Let’s see if this stock has what it takes to make our list of Rule #1 stocks!

Company Profile:

From Yahoo Finance

XTO Energy, Inc. and its subsidiaries engage in the acquisition, development, exploitation, and exploration of producing oil and gas properties in the United States. It also involves in the production, processing, marketing, and transportation of oil and natural gas. The company’s proved reserves are principally located in the Eastern region, including the East Texas basin, northwestern Louisiana, and Mississippi; North Texas region, including the Barnett Shale; San Juan region, including properties in the San Juan and Raton Basins of New Mexico and Colorado, as well as properties in the Uinta Basin of Utah; Permian and South Texas region with properties in West Texas, southeastern New Mexico, and South Texas; Mid-Continent and Rocky Mountain region with fields located in Wyoming, Kansas, Oklahoma, and Arkansas; and the Gulf Coast region.

Market capitalization is $24.6B.

Fundamental Analysis:

Let’s see what the Big Five have to say about the moat.

As Rule #1 investors, we are looking for a minimum 10% return on invested capital in each of the last 10 years. Unfortunately, XTO’s management did not deliver on this requirement. There were 4 years with sub 10% ROIC and that does not include 1998 when the ROIC was -6.2%! Now, the last 4 years have delivered 10%+ ROIC and it has been steadily increasing.

The Return on Equity shows this improving trend as the 10 year average ROE is 14.59% while the 5 year average ROE improves to 22.98%.

The equity growth rate has been surprisingly impressive and constant! The 9 year rate of equity growth is an astounding 44.53%! The 5 year rate stays close at 43.7%. The 3 year rate slightly improves to 50.77%! Last year’s rate has dropped off those significant rates to a mere 37.83%.

The earnings per share growth rate has delivered similar if not greater numbers. The 7 year rate is 61.27%. The 5 year rate drops to 41.41%. The 3 year rate skyrockets to 71.04%. And last year’s rate was a decent 36.71%.

And you can see why their equity growth rates have been so high because their sales growth rates are in the same ballpark. The 9 year rate is 41.9%. The 5 year rate increases to 46.58%. The 3 year rate further increases to 58.96%. Last year’s rate dropped back down to 30.24%.

And you guessed it, cash flow growth rates show similar numbers. The 9 year rate is 51.25%. The 5 year rate drops to 38.01%. The 3 year rate jumps right back up to 58.11%. And last year’s rate was 35.11%.

These are definitely some massive (and consistent) growth rates. The company fell short on the ROIC during the first part of the period, but have been improving ever since.

Stock Analysis:

Let’s put a sticker price on this stock.

For my future EPS growth rate, I typically look at the historical equity growth rates and take a fairly conservative growth rate. In this case, my initial estimate was 43.7%! That is the 5 year equity growth rate and is lower than the 9 year rate of 44.53%!

However, analysts have forecast a much more down to earth growth rate of 12.5%. So I’ll stick with that although by historical standards, it is quite low.

For my future P/E, I chose the 5 year average P/E of 12.93 which is slightly lower than the current P/E of 14.45.

With this information, my sticker price worked out to $45.67. At the current price of $63.58, Mr. Market is demanding a premium of 39.23%.

Here is my Rule #1 analysis of XTO.

Here is the 1 year stock price chart:

A nice up trending stock chart.

Conclusion:

Well, I am finding this a hard stock to put in perspective. From one side, it does not meet our Rule #1 criteria due to the ROIC in the early part of the decade. But things have definitely improved since then. Also, these growth rates are quite phenomenal and once again lean me towards wanting this stock to be a Rule #1 candidate.

What are your thoughts on this stock? Do you consider it a Rule #1 stock?

Full Disclosure: I do not own shares in XTO.

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