We came across a bullish thesis on Texas Pacific Land Corp. (TPL) on gurufocus by Akim Guerreiro. In this article we will summarize the bulls’ thesis on TPL. Texas Pacific Land Corp. share was trading at $789.25 as of Sept 11th.
A broad sunset view of a modern oil & natural gas facility in the Permian Basin.
Texas Pacific Land Corp. (TPL) is a unique real estate company with a business model centered around holding strategic land and receiving royalties from various economic activities. While often mistaken for an energy company due to its substantial income from oil and gas royalties, TPL does not directly produce any oil. Instead, it owns vast land holdings in Texas, particularly in the Permian Basin, the highest-producing oil field in the U.S., allowing it to benefit from rising global demand for oil. Its revenue comes from diverse sources, including land leases, materials sales, water services, and infrastructure projects such as solar and wind installations. The water business, which includes production, treatment, and desalination, is TPL’s most promising growth driver, having recently contributed $15.4 million to the company’s total revenue growth. TPL continues to invest heavily in this sector, positioning it for high growth through new technologies and facilities.
TPL’s financials are robust, with no debt and $837 million in cash, supported by exceptional operating margins ranging from 72% to 96% over recent years. This has enabled the company to maintain a strong free cash flow, reaching $114.5 million in the first quarter alone. While it pays a modest dividend, TPL prioritizes reinvestment and share buybacks, which have proven effective for long-term value creation. The current stock valuation, however, is relatively high, trading at about 40 times earnings, up from 30 times before a recent price rally driven by strong earnings. Although this valuation exceeds its historical average of around 35 times earnings, the company’s high growth rate—averaging 40% per year over the past decade—suggests that its financial performance could naturally bring the valuation down over time without a significant pullback in stock price. For investors, this presents a nuanced situation: while the stock may seem expensive on a multiple basis, its growth profile could justify the current price, making it worthwhile to continue accumulating shares, particularly if it dips closer to its historical valuation.
Risks to this investment thesis include potential declines in U.S. energy demand, which could reduce royalty revenues, and broader economic downturns that might impact activities on TPL’s lands. However, the company’s diversified revenue base, including its exposure to renewable energy and infrastructure projects, offers some protection against these risks. Furthermore, while there is a possibility of management becoming complacent due to high margins and lack of competition, recent actions show a continued commitment to growth and shareholder value. Overall, Texas Pacific Land remains a compelling investment opportunity, combining a strong balance sheet, diverse revenue streams, and significant growth potential, even at a premium valuation.
Texas Pacific Land Corp. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 21 hedge fund portfolios held TPL at the end of the second quarter which was 24 in the previous quarter. While we acknowledge the risk and potential of TPL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TPL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.