Diamondback Energy Inc (NASDAQ: FANG) is an independent oil and natural gas company, which engages in the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves. The company was founded in 2007 and is headquartered in Midland, TX.
The company's stock is trading at $145.9, as of 25 March 2022, and is up by 30% year-to-date (YTD). On an annual basis, the stock is up by 98% whilst the S&P 500 is up by 16%, which means the stock has performed better than the broader market by approximately 82% over this period.
What do the underlying trends at Diamondback Energy Inc tell us about its potential as a long-term investment? Let’s take a closer look and see what the numbers tell us.
The importance of fundamentals
To better understand the underlying trends at Diamondback Energy Inc and analyze if the company will be a good 'buy and hold' investment, it’s good to start by getting an overview of the fundamentals.
By 'fundamentals', we mean a set of key metrics which include price to earnings ratio (P/E ratio), price to book value (P/BV), price to sales ratio (P/S ratio), earnings per share (EPS) and debt. When looked at together, fundamentals can tell us whether or not a company is likely to be a good investment, and for as long as investors have been buying stocks, they have relied on fundamental analysis to assess the financial health of an organization as well as its growth prospects.
What do Diamondback Energy Inc’s fundamentals tell us about the investment opportunity? Let's have a look.
FANG stock fundamental analysis
First of all, let's look at Diamondback Energy Inc's EPS, which indicates how profitable the company is on a 'per share' basis. This metric is calculated as net income (after dividends on preferred stock) divided by the number of outstanding shares.
Diamondback Energy Inc's EPS is 12.3 based on figures from its most recent financial statements, and this fell by 143% year-on-year, which is somewhat underwhelming.
Analyzing a company's price to earnings (P/E) ratio is also helpful because it tells us how cheap or expensive a stock is, or how much of a premium investors are willing to pay for its earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
According to its last reported financials, FANG has a P/E ratio of 11.6. This is 18% lower than the average P/E ratio across the industry benchmark (which is 14.1) and suggests that the stock is inexpensive in relation to its earnings.
Next, let's look at the P/S ratio, which looks at a company's stock price compared to its sales (revenues). It is calculated as the current price divided by sales for the previous 12 months, and is useful because it helps us understand how much investors are willing to pay for every dollar of a company's revenues. The consensus opinion is that stocks with a lower P/S ratio offer better value, and stocks with a very low P/S ratio are known as 'value stocks'. However, what is considered a 'high' or 'low' P/S Ratio is relative and can vary across different sectors, so the best way to objectively assess this is to compare a company against its industry peers.
With a P/S ratio of 3.74, the company is slightly overpriced compared to similar companies within the same sector. The sector-wide average is 2.7, which is 39% higher than Diamondback Energy Inc's.
We also like to look at a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
According to its last reported filings, Diamondback Energy Inc's P/BV is 2.1, which is 25% lower than the industry benchmark of 2.8.
Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
Diamondback Energy Inc has total debt of $6.8bn as of 25 March 2022, and this has increased by 14% over the past year. The company also has cash & short-term investments totalling $672m, giving it a 'net debt' of $6.1bn.
Based on these figures, Diamondback Energy Inc's current levels of net debt don't worry us, as the company generates enough revenue to service its debt, and is not using debt to fund their operations, which is good to see.
Is Diamondback Energy a buy?
When we looked at the trends with Diamondback Energy Inc’s stock, we liked what we saw.
Specifically, the stock is up by 30% YTD and up by 98% over the past year. In addition, compared to companies in the same sector, FANG has a lower P/E ratio and lower P/BV. This gives us confidence that the company is on the right track.
In summary, we think the future is bright for Diamondback Energy Inc and the company is certainly worth a closer look.
As with any stock however, there are additional factors to consider before making an investment decision. This analysis is general in nature and based on historical data, and it does not take into account your specific investing objectives or financial circumstances.
Additionally, this article does not look at the macro environment where geopolitical headwinds, internal company changes and individual technicalities in the way a company conducts its business can have a significant impact on a company's long term outlook. Please do your own due diligence before deciding to invest.