My Photo
My investing philosophy mostly centers around the Value discipline and GARP- Growth at a Reasonable Price. This blog includes commentary on market conditions as well as fundamental analysis of specific companies. Graduated from Rhodes College with a degree in Business with concentration in Finance & Marketing. Currently working on obtaining the CFA designation. Previously worked in Mortgage Trading for a major bank. Use MS Excel extensively for developing investment models, notably valuation models based on DCF methods.

Thursday, February 21, 2008

Chesapeake Energy Consistently Beats EPS Estimates

Chesapeake Energy (nyse:CHK) $44.16- Chesapeake Energy announced 4th quarter and full year earnings Thursday after the close. For Q4, EPS came in at $.93 / diluted share and $3.21 / diluted share for full year 2007. Analysts expected $.81 and $3.06, respectively. Profit was down year over year due to lower natural gas prices, realized selling price was $8.43 versus $9.11 a year earlier. I recommended CHK back in July when I wrote this analysis: CHK- Follow the Smart Money.

It’s confounding that the 25-30 analysts that follow CHK consistently underestimate quarterly EPS results. CHK has beaten estimates for 21 straight quarters; the average surprise is 14.5%. The question is why are the analysts consistently off the mark? 21 periods in a row?

I know that forecasting earnings is a tough task as no one can accurately predict the future. But, for the past several quarters I have calculated my own estimates and my accuracy has range from hitting the number to being of a few cents. For 4Q07, released Thursday after the bell, the consensus was $.81, my estimate was $.91. and the actual came in at $.93. The analysts were off 12 cents.

Is it that I am a prolific forecaster? No, it’s because the numbers are out there. CHK doesn’t provide revenue and earnings guidance, but they do provide production and expense forecasts. CHK Outlook Applying some simple math, one can calculate an EPS figure.

I have included a screen shot of my model-my estimates are in green, the actual in bright yellow.


In addition, a week before announcing earnings, CHK releases its production results Production Announcement. Therefore, the EPS forecast model could be refined by entering the actual production figures. Selling price and costs are still unknown, but the figures from CHK’s outlook have always been practically spot-on.

With the all the needed information available, how do the analysts continue miss by so much? I have no clue. We know that they are highly intelligent people with considerable resources. I surmise that since they cover so many companies, sometimes it’s not feasible to keep up-to-date on every single stock in their coverage universe. Possibly, analysts don’t want to post a number that the company won’t beat, risking straining ties to the target firm. I guess it just goes to show the quality of equity research.

It’s no secret that the analysts low-ball the consensus estimate, for The Street prices-in an earnings beat each quarter. Of course, I can’t be sure that the Market does, but since shares react sluggishly, sometimes fall, after toping estimates, suggests that market is expecting higher actuals.

A common pattern for CHK is moderately rising share prices in the days leading up to the announcement and continuing for a day or two after the release, and then a pullback nearly erasing all recent gains.

OUTLOOK:
In my opinion, Chesapeake is attractive. The CEO, Aubrey McClendon has been on a buying spree; he bought 20 million worth of CHK in January. Ostensibly, A CEO wouldn’t snap up shares on margin if he/she didn’t think the stock was going higher. Nobody can predict future stock prices, but CEOs are in the best position. Thus, Aubrey McClendon’s purchasing record is a bullish indicator. I discussed insider buying in CHK- Follow the Smart Money.

CHK has massive amounts of acreage that it acquired at attractive prices. It has been ramping up drilling, and production will continue to increase drastically. Rising gas prices coupled with increasing production will provide a significant boost to revenues.

I believe gas prices should continue to increase in the years ahead. Since NG is a clean fuel, there will be pressure to use more, in place of dirtier energy sources, such as oil and coal. John Bougearel wrote a terrific analysis on NG that’s worth a read. NG Prices Remain Elevated.

I believe in the long run, CHK will provide handsome returns. The stock has had a big run-up recently, and might be ripe for a pullback, thus I would probably be buying on dips.

disclosure: I am long chk

4 comments:

Richard said...

Fantastic page...neat design. Keep up the good work, and stop by my blog sometime

http://hedgeagainstspeculation.blogspot.com

Let me know if you're interested in trading links.

Jeff said...

Nice analysis. I have some energy exposure. RIG has been good, but I will take a new look at CHK.

I am a bit curious about how this fits with your view of analysts exaggerating earnings forecasts. My own read on the stocks that I follow are much like what you are seeing here.

Thanks again for the good suggestion.

Jeff

Turley M Muller said...

Jeff,

I like RIG too. Well positioned.

I think, on balance, analysts under estimate EPS.

During a normal cycle, we usually see more beats than misses, right?

I think that analyst haven't revised down their estimates for the slowdown in the cycle. The next two quarters might be revised, but the next two years are still too high.

Thanks for the comment.

intelligent said...

hi!

Excellent analysis. Nice work. the other day when i was on gnutrade, i found some interesting news on trading. Let me know if you are interested in our affliate program at http://www.gnutrade.com/affiliates/index.html.

thanks and do visit my blog at http://financialdata.blogspot.com

Share it

Contact Financial Alchemist



Email: gmail-turley.muller
Phone: (901) 213-8875