About the Company:
Suncor Energy Inc is an energy based company in Canada with its primary operations based on acquiring, developing, producing and marketing of Oil and Natural Gas in Canada and globally. The company at present has its focus on developing petroleum resource basin in Athabasca Oil Sands. Apart from its major operations, the company is also involved in marketing activity of third party petroleum products. Suncor Energy operates under three segments: Oil Sands, Exploration-Production and Refining-Marketing.
Models for Intrinsic Valuation:
1)Dividend Discount Model:
Value of Stock = [Current Dividend(1+growth Rate)]/ Cost of Equity- Growth Rate
Below are the required fundamentals of the company:
Current Dividend: $0.83
Average Growth Rate(10 year average)= 19.4%
Cost of Equity= RFR+ beta(Market Premium)
Cost of Equity= 3.31+1.9(9.72)
=21.77%
** RFR= Risk Free Rate on 10 year US Treasury Securities
Market Premium= Average of all the multiples from 2009 to 2014 calculated as follows:
Thus, Intrinsic Value as per DDM model is:
Value of Stock= 0.83(1+.194)/(.2177-.194)
=$42.71
ii)Residual Income Model:
Book Value of the Company: $27.86
Diluted Earnings per Share(EPS)= $2.61
Average Growth Rate(10 year average)= 19.4%
Cost of Equity= RFR+ beta(Market Premium)
Cost of Equity= 3.31+1.9(9.72)
=21.77%
Value of Stock= Book Value+[((EPS(1+g)- Book Value*Cost of Equity/ (1+Cost of Equity)]
V= 27.86+ [((2.61(1+.194)-27.86*.2177)/(1.2177)]
V=27.86-2.42
V=$25.43
iii) Price Ratios:
a)PE Ratio:
Average 5 year PE Ratios: 14.67
Expected EPS: 3.13
Value= PE * EPS= 14.67*3.13
= $45.91
b)Price/Book Value Ratio
Average 5 year Price/Book Value Ratio= 1.11
Expected Book Value= 39.4
Value= 39.4*1.11= $43.734
c)Price/Cash Flow Ratio
Average 5 year Price/Cash Flow Ratio= 6.15
Expected Cash Flow/Share: 6.91
Value= P/Cash Flow* Expected Cash Flow
= 6.15*6.91
=$42.50
Conclusion:
Thus, our above calculations suggest that the Suncor Energy Stock is undervalued as measured by the Price Ratios and DDM Model. Hence, it is strongly recommended to Buy the stock as the stock is expected to provide high returns in the near future. However, the residual dividend model has provided a different results and thus, it is suggested to avoid this model as part of our analysis.
Works Cited
SUNCOR ENERGY INC. (SU. (n.d.). Retrieved March 25, 2014, from 4-traders.com: http://www.4-traders.com/SUNCOR-ENERGY-INC-1411810/financials/
Yahoo Finance. (n.d.). Suncor Energy. Retrieved March 25, 2014, from Yahoo Finance : http://finance.yahoo.com/q?s=SU
