What a brutal six months it’s been for Comstock Resources. The stock has dropped 37.5% and now trades at $13.30, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Comstock Resources, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Comstock Resources Will Underperform?

Even with the cheaper entry price, we don’t have much confidence in Comstock Resources. Here are three reasons why CRK doesn’t excite us, plus one stock we’d rather own.

1. Long-Term Revenue Growth Disappoints

Cyclical industries such as Energy can make mediocre companies look great for a time, but a long-term view reveals which businesses can actually withstand and adapt to changing conditions. Over the last five years, Comstock Resources grew its sales at a sluggish 5.7% compounded annual growth rate. This fell short of our benchmark for the energy upstream and integrated energy sector.

2. Shrinking EBITDA Margin

Adjusted EBITDA margin is an important measure of profitability for the sector and accounts for the gross margins and operating costs mentioned previously. Unlike operating margin, it is not distorted by accounting conventions around reserves, drilling costs, and assumptions on commodity consumption from the well or basin. Adjusted EBITDA highlights the economic reality of how much cash the rock produces before the capital structure (debt service) and the drilling budget (capex) are considered.

Looking at the trend in its profitability, Comstock Resources’s EBITDA margin decreased by 6.1 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its EBITDA margin for the trailing 12 months was 72.2%.

3. Cash Burn Ignites Concerns

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.

Comstock Resources’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 9.1%, meaning it lit $9.06 of cash on fire for every $100 in revenue.

Final Judgment

Comstock Resources falls short of our quality standards. After the recent drawdown, the stock trades at 18.7× forward P/E (or $13.30 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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