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Should Value Investors Pick Golar LNG Partners (GMLP)?

Zacks

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Golar LNG Partners LP GMLP stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.


On this front, Golar LNG Partners has a trailing twelve months PE ratio of 7.62, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.86. If we focus on the stock’s long-term PE trend, the current level puts Golar LNG Partners’ current PE ratio above its midpoint over the past three years, with the number having risen slowly but steadily over the past few months.

Further, the stock’s PE also compares favorably with the Zacks classified Oil and Gas – Refining and Marketing – Master Limited Partnerships industry’s trailing twelve months PE ratio, which stands at 98.22. This indicates that the stock is radically undervalued right now, compared to its peers.

We should also point out that Golar LNG Partners has a forward PE ratio (price relative to this year’s earnings) of just 8.79, so it is fair to expect an increase in the company’s share price in the near future.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, Golar LNG Partners’ P/CF ratio of 5.23, is lower than the Zacks classified Oil and Gas – Refining and Marketing – Master Limited Partnerships industry average of 13.96, which indicates that the stock is significantly undervalued in this respect too.

PEG Ratio

While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.

Golar LNG Partners’ PEG ratio stands at just 1.11, compared with the Zacks Oil and Gas – Refining and Marketing – Master Limited Partnerships industry average of 2.17. This suggests a decent undervalued trading relative to its earnings growth potential right now.

Broad Value Outlook

In aggregate, Golar LNG Partners currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. Clearly, GMLP is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Golar LNG Partners might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘C’. This gives GMLP a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Although the company’s recent earnings estimates have been positive lately. the current quarter has seen two estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen two up and none down in the same time period.

This has had a meaningful impact on the consensus estimate though as the current quarter consensus estimate has risen by 4.4% in the past two months, while the full year estimate has increased by 7.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

The stock holds a Zacks Rank #3 (Hold), which indicates expectations of in-line performance from the company in the near term. However, Golar LNG Partners is enjoying bullish analyst sentiment, as indicated by the positive estimate revisions, and this works in the company’s favor.

Bottom Line

Golar LNG Partners is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a good industry rank (Top 34% out of more than 250 industries) further supports the growth potential of the stock. Some broader factors are also turning favorable for the industry, which is expected to benefit from a rise in oil price post the production cap agreed upon by a number of OPEC members as well as non-OPEC nations.

Further, over the past year, the Zacks Oil and Gas – Refining and Marketing – Master Limited Partnerships industry has outperformed the broader market, as you can see below:

So, despite a Zacks Rank #3, we believe that bullish analyst sentiment and favorable industry factors make this value stock a compelling pick.

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