What a time it’s been for Liberty Energy. In the past six months alone, the company’s stock price has increased by a massive 117%, reaching $33.19 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Liberty Energy, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Liberty Energy Not Exciting?
We’re happy investors have made money, but we're cautious about Liberty Energy. Here are two reasons there are better opportunities than LBRT and a stock we'd rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Liberty Energy, which averaged 23.3% gross margin over the last five years, exhibiting bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Liberty Energy has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2.3%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
Liberty Energy isn’t a terrible business, but it doesn’t pass our quality test. Following the recent surge, the stock trades at 105.9× forward P/E (or $33.19 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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