Anadarko Petroleum Corporation (APC): 13% Earnings Growth Per Year at a Fair Price

Anadarko’s valuation

The company currently trades at a 16 forward P/E, which corresponds with its growth nature. However, most of the future growth seems to already be priced in. Let’s estimate the intrinsic value of the company and determine what future growth rate the markets now expect from Anadarko Petroleum Corporation (NYSE:APC) based on its current market price.

Intrinsic value estimate using the discounted cash flows (DCF) method

The company and analysts estimate a 13% annual earnings growth for the next five years. Taking this figure, the company’s current price of $90 and a 10% discount rate, the DCF formula reveals that at the current price, investors are expecting a 1.5% annual growth rate after the initial five-year period of rapid 13% annual growth.

This estimate of future growth is inline with my expectations, and I therefore conclude that Anadarko’s stock price is fair, based on the above growth estimates. I’m expecting a stable price in oil and gas at $90/barrel and $3.50/Mfc.

Risks

The major risk facing Anadarko investors at the current price is the potential fall in oil and natural-gas prices.

Anadarko’s profit is approximately equally dependent on oil and natural gas. Therefore, it doesn’t really matter which of the two commodities rises in price, as long as the total price of these two resources keeps at least on current levels, or ideally, increases.

Prices of crude oil are expected to remain flat at best, in nominal U.S. dollar terms, if not fall gradually by 2% to 3% each year. However, the estimates widely differ and demonstrate the risks and uncertainty associated with basing the future earnings growth estimates on the future prices of oil and natural gas. On the other hand, prices of natural gas are forecast to rise moderately over the longer horizon.

Key takeaways

Anadarko Petroleum Corporation (NYSE:APC) is an excellent company with compelling growth prospects. However, most of this growth is already priced into the stock. Anadarko itself doesn’t offer me any major incentive to buy now, at this price level. It is fairly priced and there is a substantial downside risk should the price of oil and gas fall or should the overall stock market stumble. I will keep an eye on Anadarko and start buying at $75 per share on a major pullback, which would provide me with an adequate margin of safety.

The article Anadarko: 13% Earnings Growth Per Year at a Fair Price originally appeared on Fool.com and is written by Martin Vlcek.

Martin Vlcek has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Martin is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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