value the stock price. Intrinsic valuations use forecasting and assumptions to
determine the stock price per share. Overall, the intrinsic valuation is the most reliable because it examines many different angles of the company.
Method of Comparables
Price
Trailing Price / Equity $82.20
Forwarding Price / Equity $93.41
Price / Book $103.29
Dividend / Yield $72.92
Price Earnings Growth $59.88
Price / EBITDA $75.65
Enterprise Value / EBITDA $97.24
The method of comparables is a technique that measures the price per share of a company’s stock. Under this method, we computed the ratios in the summary table and then found the industry averages of Apache’s competitors. Apache’s competitors consist of Occidental, Anadarko, Devon, and XTO. The industry averages are then used in several calculations to determine Apache’s price per share of stock. After this, evaluating Apache’s stock as overvalued, undervalued or fairly valued is obvious. The outcome of our method of comparables calculations are discussed below.
TRAILING PRICE TO
EARNINGS PRICE EPS P/E AVERAGE P/E APA SHARE PRICE
Apache 99.18 7.51 10.68 10.95 82.20
Occidental 66.76 4.8 12.02
Anadarko 57.24 10.39 4.84
Devon 91.31 6.41 13.08
XTO 65.68 5.01 13.84
Trailing Price to Earnings
To find the trailing Price to Earnings we first had to compute Earnings per Share and Price to Earnings for Apache and its competitors. To compute these ratios we used the stock prices, number of shares outstanding, and net income from each of the
company’s most recent 10K. After computing each company’s price to earnings ratio we took an average of our competitor’s ratios by adding the four ratios together and
then dividing this number by four. To find the value of Apaches stock based on the trailing price to earnings model we multiplied the average Price to Earnings ratio of our competitors by Apaches Earnings per Share. This gave us a value price of $82.20 per share of Apaches stock. This model implies that Apaches current stock price per share of $99.18 is overvalued as of November 1, 2007. Apaches Price to Earnings ratio of 10.68 is also close to the average Price to Earnings of our competitors of 10.95, but if Anadarko’s outlier were taken out the average would be higher. This would imply that investors are expecting Apaches earnings growth to be lower than the rest of the industry.
FORWARD PRICE TO
EARNINGS PRICE EPS P/E AVERAGE P/E APA SHARE PRICE
Apache 99.18 6.67 14.15 14.01 93.41
Occidental 66.76 5.77 12.32
Anadarko 57.24 12.124 18.28
Devon 91.31 6.356 11.25
XTO 65.68 4.382 14.17
Forwarding Price to Earnings
In order to calculate the Forwarding Price to Earnings ratio we needed to find each company’s Earnings per Share as well as their Price to Earnings ratio. All of this information was found on Yahoo Finance. Apache’s November 1, 2007 price per share
along with all competitors was also found on Yahoo Finance. To find the Price to Earnings ratio we simply divided the Price per Share by Earnings per Share. After finding the Price to Equity ratios for each company, we were able to compute the industry average. The industry average consisted of adding all of Apache’s competitors Price to Earnings ratio and dividing the sum by four. After this, we computed Apache’s price per share by multiplying the industry average by Apache’s Earnings per Share. This resulted in a stock price of $93.41, when compared to Apache’s stock price on November 1, 2007 of $99.18; one can see the two are very close. By way of the Forwarding Price to Earnings model, we are able to conclude that Apache’s stock is fairly valued.
PRICE TO BOOK PPS BPS P/B INDUSTRY AVERAGE APA SHARE PRICE
Apache 99.18 43.81 2.26 2.36 103.29
Occidental 66.76 26.43 2.53
Anadarko 57.24 34.56 1.66
Devon 91.31 46.84 1.95
Price to Book
The price to book ratio, is used to measure a stocks market value to its book value. The stock price per share was located using the price as of November 1, 2007. We found these values for our company as well as our competitors using Yahoo
Finance. In order to find the Price to Book value we divided the price per share by the book value per share. This gave us the price to book value. After this, we took the industry average, which included the average of our four competitors and did not include Apache’s price to book ratio. Finally, we multiplied the industry average by Apache’s Book value per share. This computation gave us a result of $82.20 for the price per share of Apache’s stock. According to the current stock price of Apache, $103.29, this indicates that it is fairly valued. This was no surprise because of the close proximity of Apache’s price to book ratio compared to the industry price to book ratio.
DIVIDEND
YIELD PPS DPS D/P INDUSTRY AVERAGE
APA SHARE PRICE Apache 99.18 0.15 0.0015 0.0021 72.92 Occidental 66.76 0.22 0.0033 Anadarko 57.24 0.09 0.0016 Devon 91.31 0.14 0.0015 XTO 65.68 0.12 0.0018
Dividend Yield
Using the dividend yield, informs investors and managers the amount of
dividends the company pays out based on its stock price per share. The dividends were found using Yahoo Finance, and then the ratio Dividend to Price was found. Once this was done, we were able to compute the industry average. The industry average consisted adding the Dividend to Price ratio of all of Apache’s competitors, and then dividing by four. Apache’s stock price was computed by dividing their dividend per share, as of November 1, 2007, by the industry average. The price per share ended up being $72.92, which makes the current stock price overvalued when comparing it with its current stock price of $99.18.
Price Earnings Growth
Price Earnings Growth, or PEG, is a measure of a stocks overall value while considering earnings growth. Using Yahoo Finance, we were able to find the PEG for all of Apache’s competitors. By adding each company, with the exception of Apache, and dividing by all four of the competitors we were able to determine the industry average. From here, we were able to conclude Apache’s stock price per share by multiplying the industry average by Apache’s total revenue growth rate of 7%, and then multiplying that value by Apache’s EPS. The stock price per share of Apache based on this model is $59.88. Clearly, this price is much lower than the November 1, 2007 stock price of $99.18. We can conclude the current price of Apache’s stock is overvalued.
PRICE EARNINGS
GROWTH PPS EPS PEG INDUSTRY AVERAGE
APA SHARE PRICE Apache 99.18 6.67 1.78 1.28 59.88 Occidental 66.76 5.77 1.18 Anadarko 57.24 12.124 1.95 Devon 91.31 6.356 1.27
PRICE TO
EBITDA PPS EBITDA (IN BILLIONS) P/EBITDA INDUSTRY AVERAGE
APA SHARE PRICE Apache 99.18 6.77 14.65 11.17 75.65 Occidental 66.76 9.38 7.12 Anadarko 57.24 6.74 8.49 Devon 91.31 7.51 12.16 XTO 65.68 3.88 16.93 Price to EBITDA
Price to EBITDA takes into consideration the price per share compared to Earnings before interest, taxes, depreciation, and amortization. We found Apache’s EBITDA on the December 31, 2006 10-K and recorded it on the graph above as a decimal of a billion. From here we were able to compute the Price to EBITDA ratio by dividing the price per share by their EBITDA. After this, we were able to find the
industry average by adding Apache’s competitors Price to EBITDA ratio, taking that sum and dividing it by four. This gave us an industry average of 11.17 which we used in calculating the price per share of Apache’s stock. Along with the Industry average, we used Apache’s EBITDA and multiplied the two. The product of this gave us our price per share of $75.65. This too makes Apache’s stock overvalued.
ENTERPRISE VALUE TO
EBITDA EV
EBITDA (IN
BILLIONS) EV/EBITDA INDUSTRY AVERAGE
APA SHARE PRICE Apache 43.78 6.77 6.47 6.37 97.24 Occidental 58.26 9.38 6.21 Anadarko 39.89 6.74 5.92 Devon 43.06 7.51 5.73 XTO 29.52 3.88 7.61
Enterprise Value to EBITDA
Enterprise value to EBITDA, earnings before interest, taxes, depreciation, and amortization, takes into account companies Enterprise Value based on its EBITDA. We found Apache’s competitors Enterprise Value as well as EBITDA on Yahoo Finance. For Apache, we located their EBITDA on the December 31, 2006 10-K. The Enterprise Value was computed by adding Apache’s price per share with the book value of liabilities, and subtracting cash and cash equivalents. This resulted in Apache’s
Enterprise Value being 43.78. Next, we divided Enterprise Value by EBITDA in order to find Enterprise Value to EBITDA. After this, we calculated the industry average by adding Apache’s competitors Enterprise Value to EBITDA ratios and dividing it by four. The stock price consisted of first multiplying the industry average by Apache’s EBITDA which resulted in $43.1 billion. Then, we subtracted Apache’s book value of liabilities, $11.0, and added cash and cash equivalents, $0.140 billion. We ended up with $34.16, and then divided this number by the number of shares Apache has outstanding,
price of $97.24. Obviously, this is extremely close to the actual November 1, 2007 stock price of Apache. According to this model, our stock price is fairly valued. This was not surprising, because our Enterprise Value to EBITDA ratio is particularly close to the industry average.
Price to Free Cash Flows
The Price to Free Cash Flows ratio compares a company’s market value, or price, to its free cash flows. To compute this, we added Apache’s Operating Cash Flows, $4.31 billon, with its Investing Cash Flows, $(5.78) billion. We ended up with a free cash flow total of $(1.46) billion. Due to the negative cash flow, we decided to throw this model out because of its lack of value. If we were to continue to compute the Price to Free Cash Flow ratio, we would gather our competitors Operating Cash Flows and Investing Cash Flows. After adding the two, we would divide the company’s November 1, 2007 stock price by the free cash flow. Then we would determine the price per share of the stock. However, due to the negative free cash flow of Apache, this model will not be a valid indicator of our stock price per share.
Conclusion
According to most of the method of comparable computations, Apache is an overvalued company. Only two models, Forwarding Price to Equity and Enterprise Value to EBITDA, gave us a result which reported that Apache was fairly valued. Using the method of comparables to attempt to find the price per share of stock is not the most reliable method. Also, the method of comparables does not take into account that you may operate or be different from your competitors. This is evident when
computing the industry average based solely on your competitors figures. The Intrinsic Valuation is a much more reliable and sensible