Each week, the Valens Securities team highlights our most interesting insights from across our tools and our analysis, including individual company industry and macro insights.
Expectations for PXD to see ROA’ expand past historical highs is unwarranted, as management is not incentivized to focus on ROA’ expansion, and has concerns about their ability to effectively manage costs
PXD is trading at a 1.9x V/A’, near historically average valuations. At these levels, the market is pricing in expectations for ROA’ to improve from 2.3% in 2015 to 18.7% in 2020, accompanied by consistent Asset’ shrinkage of 2.6%. Analysts have more bearish expectations than the market, expecting ROA’ to continue declining, with slight Asset’ growth going forward. Moreover, Valens’ qualitative analysis highlights that management is growing concerned about their ability to further improve operations as well as their ability to meet cash flow expectations. Additionally, management’s compensation is not designed to incentivize them to improve profitability, limiting potential ROA’ upside going forward. Aggressive market expectations appear unwarranted in the face of poor management compensation structure as well as management concerns about cash flows and operations, and equity downside may be justified.
Company Specific Highlights & Insights:
ECL, EQM, HD, HEP, HRS, INTU, KFY, LKQ, NSC, OKE, PANW, PCG, PCLN, PRGO, SCTY, SWKS, TK, VRSK, WMB
Aggregate ECF™ Trend Analysis:
Management confidence levels continue to be volatile, ranging between 24 month highs and 24 month lows in the past 6 months. After having persisted at the higher end of the range in Q3 2015, in Q4 2015 the Management Growth Confidence Index and 3 month moving average of the index plunged to the lower end of recent levels. In April, Management Confidence spiked higher, but until this is confirmed for another several months, a return to growth cannot be confirmed.
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