Range Resources Corporation (RRC) is a United States-focused natural gas company which recently traded at astronomical price-to-earnings multiples over 200. It is an awesome company whose earnings cumulative average growth rate is expected to top 20%. Unfortunately, even this prodigious growth just doesn't justify its valuation multiples. When compared to its peers, it is readily apparent that investors should stay away from RRC shares at current price levels, even after considering growth projections.
Computing Future Valuations from Growth Projections
Regardless of how shiny a stock is, investors should never buy a stock because the company is fancy, disruptive, or because it is fun to read about. Media coverage, drama, the next big thing, and other distractors cannot justify paying one dollar for fifty cents.
Instead, investors should be focused on growing the value of their assets through purchasing stocks for less than what they are worth. A poor company trading at a dismal price may be an excellent trade. RRC shares are trading at the other extreme: Range Resources is a great company trading at incredibly enthusiastic valuations which should be avoided. Its metrics are provided with other independent United States-focused oil and gas companies:
Ticker | Company | P/E | Earnings Growth Est. | P/S | Sales Growth Est. |
RRC | Range Resources | 234.0 | 22.6% | 7.3 | 10.4% |
Continental Resources | 18.8 | 8.0% | 5.8 | 27.8% | |
Southwestern Energy | 17.6 | 15.4% | 3.6 | 31.1% | |
Devon Energy | 10.8 | 7.9% | 1.9 | 3.2% | |
Chesapeake Energy | 7.4 | 8.3% | 1.0 | 9.7% |
Future valuation multiples of RRC and its peer stocks were modeled by combining expected growth and trailing valuation multiples. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follows:
(Click to enlarge)
(Click to enlarge)
The projected crossover dates span well into the future which demonstrate how RRC shares are overpriced. Even assuming that long term analyst growth rates will continue indefinitely (which is itself ridiculous) it would take almost two decades of sustained, phenomenal earnings growth for RRC's current price-to-earnings ratio to be equivalent to that of Continental Resources.
These projections illustrate the absurdity of current valuations for RRC. Analyst estimates for faster-than-economic growth are not predictive after three years or so, yet somehow investors are paying prices for RRC shares which imply they can see the distant future. Furthermore, RRC's projected 22.6% earnings growth cannot outpace its 10.4% projected sales growth forever. Hope springs eternal even though natural gas does not.
Estimated convergence years were calculated below for RRC:
RRC Competitor | P/E Equivalence | P/S Equivalence |
Continental Resources | 2030 | N/A |
Southwestern Energy | 2053 | N/A |
Devon Energy | 2035 | 2030 |
Chesapeake Energy | 2038 | 2349 |
Investors should avoid Range Resources at current prices. Instead, they should consider other companies on this list as more reasonable alternatives which can be justified without the absurdity of two decades of sustained, phenomenal growth. In particular, in the wake of its corporate governance scandal Chesapeake Energy is trading at better valuations which are attractive when contrasted with its more expensive peers. Another standout is Southwestern Energy due to its excellent growth prospects which trade at reasonable prices. Both of these firms have growth estimates and valuation multiples which result in valuation dominance over Range Resources for the foreseeable future.
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