Crescent Point Energy Corp 2

I do not own this stock (TSX-CPG, OTC- CSCTF). I got this idea from My Own Advisor blog.

The insider trading report is rather interesting with $10.4M of insider buying and $16.1M of insider selling, with a net selling at $5.7M. Most recently there was insider buying and it has been suggested that recent insider buying may point to good time to buy this stock. See Canadian Insider web site.

I see no options, but insiders have options like vehicles like Restricted Share Units and Deferred Share Units. And, insiders certainly own a lot of shares. For example, the CEO has $38M in shares and $11.5M in options. The CFO has $9M in shares and $6.9M in options. A director has $20M in shares and $0.7M in options. It is certainly a good sign when there is large insider ownership.

According to Reuters, there are 245 institutions that own 45% of the outstanding shares. Over the past 3 months they have increased their shares by 7%. This is a significant increase and therefore is a positive.

They have had two negative earnings years in the last 5 years, so I cannot do a Price/Earnings Ratio test. However, the P/E presently at 37.23 is a very high P/E ratio and suggests that the stock price is high. This P/E is based on a stock price of $36.86 and a 2012 EPS of $0.99. The problem with this test is that the stock is not earning much in income.

I get a Graham Price of $22.60. The current stock price of $36.86 is some 63% higher or the stock has a Price Graham Price Ratio of 1.63. A good price is when the stock price is at or below the Graham Price. This P/GP ratio suggests that the stock price not cheap.

Looking at the Price/Book Value per share Ratio, I get a current one of 1.61. A cheap stock is when this ratio is at 1.00 or lower. Obviously, this stock is not cheap. However, it does not show it as expensive either. (I did not complete the spreadsheet, so I do not know what the historical median ratio has been.)

The current dividend yield is 7.49% and this is some 12% lower than the 5 year median dividend yield of 8.57%. This lower dividend yield implies that the current stock price is relatively high. However, this stock used to be an income trust. It is expected that the dividend yields of income trusts would come down to a 4 to 5% dividend yield. This yield is higher and suggests that stock price may be low.

It is difficult to do stock tests when I do not complete the spreadsheets. However, nothing points to this stock being cheap. It is obvious that analysts feel that the stock price is reasonable. My one problem with this stock is that it cannot seem to make much in the way of profits.

When I look at analysts' recommendations I find Strong Buy, Buy and Hold. The consensus recommendation is a Buy. (Almost every stock I review was this set of recommendations.) The consensus 12 months stock price is $47.70. This implies a 36.9% return with 29.41% from capital gains and 7.49% from dividends.

A number of analysts have suggested that the dividend is relatively safe at present. They adjust the Payout Ratio to account for the DRIP program where a lot of the dividend payment is going back to the company for the purpose of purchasing more shares. However, it is also possible that the DRIP program could cause problems in the future for the company because of the big increases in outstanding shares.

One analyst thought the dividend was safe because of today's commodity price environment. The company also has a hedge program to mitigate the price volatility. (This would imply that the company's dividend could be in danger if we hit a recession. A number of economists think we will soon.)

The Happy Capitalism blogger recently gave his analysis on this stock. He says to approach the stock with caution because of the current downward trend of the stock's price. A number of analysts mention that it is a serial equity issuer. They issue stock for their acquisitions and under DRIP. I can only find one analyst who says not to buy because he does not like the income trust structure and thinks it is unsustainable.

What I do not like about this company is that it does not seem to have the ability to make much in the way of a profit. The ROE very low (3.4% for 2011). The earnings do not even come close to covering the distributions. Looking at 2012 it is expected that the distributions will be some 287% of earnings. It may be conventional, but I like companies that can cover their distributions with their profits and this one cannot. I personally would not buy it.

I think that the risk and rewards are not in line for this company. I think that its risks are high. If we go into a recession and we always do eventually, a deep fall in oil prices could seriously damage this company. It cannot make enough in the way of profit now, what will it do in a recession. Yes, I know that so far they have produced ample rewards for their shareholders. But past results do not guarantee future results.

The Liquidity Ratio is really low. The company depends on the cash flow to cover current liabilities. When we hit the next recession this can also cause problems. Companies have gone bankrupt because of this problem. This is not like a utility that can count on cash flow, this company's cash flow will change with the price of oil and gas. The company does have a hedging program because of this problem.

I know that analysts are suggesting high total returns over the next 12 months. I do not believe it. I do understand that the company is buying assets to earn a cash flow to pay distributions. However, I think the company's real weakness is the Liquidity Ratio, but very low profits are also a problem.

I do know that with some stocks we are told that we need to valuate the companies differently using such things as Funds from Operations (FFO). However, I have been investing since the 1970's and I have heard this sort of thing before that some companies should be valuated differently. This has not always worked out.

Crescent Point Energy Corp. is a conventional oil and gas income trust with assets focused in properties comprised of light oil and natural gas reserves in Western Canada. Its web site is here Crescent Point. See my spreadsheet at cpg.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 or StockTwits.