For Petrofac Limited’s (LSE:PFC) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as PFC. The first type is company-specific risk, which can be diversified away by investing in other companies to reduce exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.
Not every stock is exposed to the same level of market risk. A widely-used metric to measure a stock’s market risk is beta, and the broad market index represents a beta value of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.See our latest analysis for Petrofac
An interpretation of PFC’s beta
With a five-year beta of 0.71, Petrofac appears to be a less volatile company compared to the rest of the market. This means that the change in PFC’s value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. PFC’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
Could PFC’s size and industry cause it to be more volatile?
With a market capitalisation of UK£2.04B, PFC is considered an established entity, which has generally experienced less relative risk in comparison to smaller sized companies. Conversely, the company operates in the energy services industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors can expect a low beta associated with the size of PFC, but a higher beta given the nature of the industry it operates in. This is an interesting conclusion, since its industry suggests PFC should be more volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
Can PFC’s asset-composition point to a higher beta?
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test PFC’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. PFC’s fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of PFC indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. However, this is the opposite to what PFC’s actual beta value suggests, which is lower stock volatility relative to the market.
What this means for you:
PFC may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as PFC is valuable to lower your risk of market exposure, in particular, during times of economic decline. In order to fully understand whether PFC is a good investment for you, we also need to consider important company-specific fundamentals such as Petrofac’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for PFC’s future growth? Take a look at our free research report of analyst consensus for PFC’s outlook.
- Past Track Record: Has PFC 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 PFC’s historicals for more clarity.
- 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.