Cimarex Energy Co. (NYSE:XEC): Can Growth Justify Its September Share Price?

Cimarex Energy Co. (NYSE:XEC) closed yesterday at $42.78, which left some investors asking whether the high earnings potential can still be justified at this price. Below I will be talking through a basic metric which will help answer this question.

View our latest analysis for Cimarex Energy

Exciting times ahead?

Cimarex Energy is poised for extremely high earnings growth in the near future. The consensus forecast from 18 analysts is extremely bullish with earnings per share estimated to surge from current levels of $6.146 to $7.342 over the next three years. This indicates an estimated earnings growth rate of 18% per year, on average, which signals a market-beating outlook in the upcoming years.

Is XEC’s share price justified by its earnings growth?

Cimarex Energy is trading at quite low price-to-earnings (PE) ratio of 6.96x. This tells us the stock is undervalued relative to the current US market average of 17.32x , and undervalued based on its latest annual earnings update compared to the Oil and Gas average of 8.73x .

NYSE:XEC Price Estimation Relative to Market, September 3rd 2019
NYSE:XEC Price Estimation Relative to Market, September 3rd 2019

Given that XEC’s price-to-earnings of 6.96x lies below the industry average, this already indicates that the company could be potentially undervalued. But, to properly examine the value of a high-growth stock such as Cimarex Energy, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 6.96x and expected year-on-year earnings growth of 18% give Cimarex Energy an extremely low PEG ratio of 0.38x. This tells us that when we include its growth in our analysis Cimarex Energy’s stock can be considered relatively cheap , based on the fundamentals.

What this means for you:

XEC’s current undervaluation could signal a potential buying opportunity to increase your exposure to the stock, or it you’re a potential investor, now may be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are XEC’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has XEC been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of XEC’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.