Monday, October 18, 2010

EnCana Corp 2

I have never considered resource companies to be long term holds. I held this company’s stock (TSX-ECA) twice. When I was holding it the second time I decided to sell in 2009 because the stock was going to split into 2 stocks. I did not have much invested and I would have ended up with even smaller investments in two separate companies. Today I will deal with EnCana and later I will deal with the piece that split off called Cenovus.

When I looked at the Insider Trading reporting, I find that there is Insider Buying of $1.8M. There is also a very little bit of Insider Selling. This insider buying is nice, but it is still a very small amount considering that this is a $22B company. Most of the buying is by directors and a bit is by some officers. This company has also been buying back shares for cancellation. Personally, I would prefer companies use excess cash to pay special dividends, but I doubt if most companies are going to do that anytime soon. Buying back shares for cancellation is still something that companies are pursuing, as it is still rather an “in” thing to do.

When I look at spreadsheet, I get a 5 year median P/E low of 7.3 and a 5 year median P/E high of 13.4. I get a current P/E of 25 and a trailing P/E of 12. The sites that use the last 12 months earnings to get a current P/E get one of 13. The problem is that the company is not expected to earn much this year. When I looked for earnings estimates for 2010, I get one of only $1.22US compared to earnings of $2.48US last year. The last 12 months earnings are at about $2.31. The estimate earnings range is quite broad at from about $.83US to $1.83US. None of the estimates for 2010 is close to last years earnings. On a relative basis, the current P/E is high and therefore points to the stock price being high.

When you look at the dividend yield, you get a better story. The current yield is 2.6% and the 5 year average is lower at 1.7%. The higher current yield points to a good current stock price. Although the increases in the dividends over the past 5 and 10 years are very high, do not forget this is a gas company and the dividends will fluctuate with the price of gas. The dividends on this stock recently peaked in 2008 and have been coming down since.

The dividends have been increased by 28% and 45% per year over the past 5 and 10 years respectively. We are supposed to be in a long term resource bull market, especially because of China and India. If dividends on average increase by 12% a year, and inflation is at 2% (lower than average), you will be earning on a current stock purchase 4% dividend yield in 5 years time and almost 8% in 10 years time. This is just another way of looking at the benefits of stocks with increasing dividends.

The Price/Book Value Ratio average for the last 10 years is 1.76 and the current P/B is 1.33. Since the current ratio is just 75% of the 10 year average, this ratio is showing that the current stock price is a good one. The Graham Price is based on a formula that takes into consideration the book value and the earnings. Using the estimate earnings for 2010, and a current book value, I get a Graham price of $25.29. The Graham price for 2009 was higher at $36.89. The current Graham Price is the lowest it has been for the last 4 years and this is because of the low earnings estimate for this year. What you want is a stock at or below the Graham Price and by this measure we are not getting that.

So, what do the analysts say? What I find is lots of Strong Buy, Buy and Hold recommendations. I can find no others. The consensus would be a Buy recommendation. (See my site for information on analyst ratings.) There are analysts that like gas as an investment and others that think that it will not do well for a while. The difference between the recommendations, as usual seems to be what price the analysts expects this stock price to be in 12 months time. The Strong Buy position feels that this stock is a good buy up to $35 a share. There are others who feel that it cannot be higher than $32 within 12 months.

I am not in the market for any resource stock at the moment, but I do like to track these stocks to see how they are doing. After all, resource stocks are a big part of the Canadian stock market.

EnCana is among the largest natural gas companies in North America. They are focused on natural gas exploration and the development of resource plays. They have a diversified portfolio of assets and hold a highly competitive land and resource position in a number of North America's most promising shale and tight gas resource plays. Alberta Energy Company Ltd. (AEC) and PanCanadian Energy Corporation (PanCanadian) companies merged to form EnCana. EnCana split into EnCana and Cenovus. Its web site is here EnCana. See my spreadsheet at eca.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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