Vermilion Energy Inc (NYSE:VET) engages in the acquisition, exploration, development, and production of oil and natural gas. The company was founded in 1994 and is headquartered in Calgary, Canada.
The company's stock is trading at $20.55, as of 17 Mar 2022, and year-to-date (YTD), it is up by 58%. Over the past year, the stock is up by a phenomenal 133% whilst the S&P 500 is up by 10%, meaning that the stock has outperformed the broader market by over 120% during this period.
But what is Vermilion Energy Inc's outlook as a long-term investment investment opportunity?
Why are fundamentals important?
On balance, the price of a company's stock is usually tied to its fundamentals over the long-term. Thus, it makes sense to start by looking at VET's fundamentals when we are considering if the company has the makings of a 'buy and hold' investment.
By 'fundamentals', we mean a set of key metrics including price to earnings ratio (P/E ratio), earnings per share (EPS), price to sales ratio (P/S ratio) and debt. When looked at together, fundamentals can tell us whether or not a company is likely to be a good investment, and for as long as investors have been buying stocks, they have relied on fundamental analysis to assess the financial health of an organisation.
What do Vermilion Energy Inc’s fundamentals tell us about the investment opportunity? Let's have a look.
Vermilion Energy Inc's fundamentals
First, let's look at Vermilion Energy Inc's EPS, which serves as an indicator of profitability. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing it by the number of outstanding shares.
Based on its most recent financial statements, Vermilion Energy Inc has EPS of 5.56, and this has climbed by 178% over the past 12 months, which is a positive sign.
Next, let's look at one of the most commonly used valuation metrics - the P/S ratio. It is calculated as the current price divided by sales for the previous 12 months, and helps us get a sense of how much investors are willing to pay for a company's revenues on a 'per dollar' basis.
The company's P/S ratio is currently 2.03 based on its last reported filings. Compared to the sector-wide average of 2.6, this is 68% lower, indicating that the stock may offer quite a bit more value compared to other companies in the same sector.
Another key metric to look at is the P/E ratio because it immediately tells a potential investor how cheap or expensive the stock is. The ratio tells us how much investors are willing to pay for a company’s earnings, and it is calculated by taking the price of a stock and dividing it by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates it might offer more value.
VET has a P/E ratio of 3.53, based on its most recent financial statements. This is 65% lower than the average P/E ratio across VET's industry (which is 10.1), and this suggests that the stock may be undervalued compared to companies in the same sector as of Mar 2022.
We also like to look at a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
According to its last reported filings, Vermilion Energy's P/BV is 1.98, and this is 10% higher than the average across its industry, which is 1.8.
Finally, when analyzing a company as an investment opportunity, you should always take a look at how much debt they have on its books, as this can help you assess how risky a company is as an investment. Carrying a large amount of debt can be a red flag if the company is not generating enough free cash flow to service the debt.
Vermilion Energy Inc has total debt of $1367M as of 17 Mar 2022, and this has fallen by 14% over the past year. The company also has Cash & Short-Term Investments totalling $5M on-hand, giving the company a 'net debt' of $1362.2M. There's no denying that this level of net debt is a bit higher than we would like to see.
Is Vermilion Energy a buy?
All in all, when we looked at the underlying trends at Vermilion Energy Inc, we were encouraged by what we saw.
In particular, the stock is up by 58% YTD, has a lower P/E ratio, and lower P/S ratio compared to competitors within the same industry. These are encouraging signs.
Whilst we can't ignore the fact that the company may be relying on debt a bit too much, we think this energy company may very well be doing enough to deserve a spot in your portfolio right now. It is certainly an interesting company worth keeping an eye on.
Keep in mind that this analysis is general in nature. No single ratio or number will give you all of the information you need, and they must be weighed along with other considerations. Please conduct your own due diligence before deciding to invest.