Concho Resources Inc. (NYSE:CXO) is considered a high growth stock. However its last closing price of $117.26 left investors wondering whether this growth has already been factored into the share price. Let’s look into this by assessing CXO’s expected growth over the next few years.
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Can we expect CXO to keep growing?
If you are bullish about Concho Resources’s growth potential then you are certainly not alone. Expectations from 19 analysts are extremely bullish with earnings per share estimated to surge from current levels of $6.528 to $11.226 over the next three years. On average, this leads to a growth rate of 25% each year, which indicates an exceedlingly positive future in the near term.
Is CXO’s share price justified by its earnings growth?
Concho Resources is available at price-to-earnings ratio of 17.96x, showing us it is overvalued based on current earnings compared to the Oil and Gas industry average of 12.11x , and overvalued compared to the US market average ratio of 16.66x .
We already know that CXO appears to be overvalued when compared to its industry average. But, to properly examine the value of a high-growth stock such as Concho Resources, 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 17.96x and expected year-on-year earnings growth of 25% give Concho Resources a very low PEG ratio of 0.72x. This means that, when we account for Concho Resources’s growth, the stock can be viewed as relatively cheap , based on fundamental analysis.
What this means for you:
CXO’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 highly recommend you to complete your research by taking a look at the following:
- Financial Health: Are CXO’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.
- Past Track Record: Has CXO 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 CXO’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.