Over the past six months, SM Energy has been a great trade, beating the S&P 500 by 21.9%. Its stock price has climbed to $38.38, representing a healthy 31% increase. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy SM? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why is SM a good business?
Operating across three key regions with over 328,000 net acres under its control, SM Energy (NYSE: SM) explores for, develops, and produces oil, natural gas, and natural gas liquids primarily from shale formations in Texas and Utah.
1. Skyrocketing revenue shows strong momentum
A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Luckily, SM Energy’s sales grew at an incredible 27.8% compounded annual growth rate over the last five years. Its growth surpassed the average energy upstream and integrated energy company and shows its offerings resonate with customers.
2. Elite gross margin powers best-in-class business model
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
SM Energy, which averaged 86.8% gross margin over the last five years, exhibits enviable unit economics in the sector. It means the company will remain profitable at lower commodity prices than peers with inferior gross margins and serves as an advantaged starting point for ultimate operating profits and free cash flow generation.
3. Excellent free cash flow margin boosts reinvestment potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
SM Energy has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition. The company’s free cash flow margin was among the best in the energy upstream and integrated energy sector, averaging 19.4% over the last five years.
Final judgment
These are just a few reasons why we think SM Energy is one of the best energy upstream and integrated energy companies out there, and with its shares outperforming the market lately, the stock trades at 4.5× forward P/E (or $38.38 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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