Is Sandridge Energy a good take over target?
Sandridge Energy has been under some consideration as a take over target . In this article I will be analyzing the company’s size, debt, cash, Ownership, Valuation and peformance.
Based on the above criteria we should get an idea if the company is attractive as a take over target.
1. Size of the company
Currently Sandridge Energy’s Market Cap is 2.98 billion.
A mid cap company is a company with a market capitalization between $2 and $10 billion. This is calculated by multiplying the number of a company’s shares outstanding by its stock price.
2. Debt and Equity
As of year end 2011 Sandridge Energy had liabilities at $4.594 billion.
The company has a total debt at 2.815 billion.
Currently the company has a large amount of debt, compared to the size of the company.
- 2012 TTM Operating Cash Flow = $738 million
- 2012 TTM Capital expenditure= $(2,069) billion
- 2012 TTM Free Cash Flow = $(1,331)
Currently Sandridge Energy is running $(1,331) free cash flow
Companies with lots of inside ownership can help facilitate buyouts because management has an incentive to sell.
Currently Sandridge Energy’s Ownership is a follows:
- Institutions = 2.476 billion
- Mutual Funds = 371 million
- Insiders = 195 million
Currently Sandridge Energy’s insiders own 15.6% of the equity.
15.6% is not a large amount of the equity.
1. Price-to-Book Value = Stock Price Per Share / Shareholders’ Equity Per Share
This ratio is used to compare a stock’s market value to its book value. The book value is the value of the company’s assets that shareholders would theoretically receive if a company were liquidated.
A lower Price-to-Book or P/B ratio could mean that the stock is undervalued. Understand that a low P/B could also mean that something is fundamentally wrong with the company.
- Stock Price as of December 4th 2012 = $6.15
- Shareholders’ Equity 2011 = $1.626 billion / 490.48 million = $3.32
- Current P/B Ratio = 1.85
Currently Sandridge Energy’s book value is $3.32 per share.
A P/B Ratio 1.85 indicates that Sandridge is currently trading at 1.85 times it’s book value. This is currently above the industry average of 1.7
Currently the Sandridge Energy’s P/B Ratio of 1.85 is too high for a take over.
2. Price to Sales Ratio = Stock Price Per Share / Revenue Per Share
Like the P/E ratio, the P/S reflects how many times investors are paying for every dollar of a company’s sales. Since earnings are subject, to one degree or another, to accounting estimates and management manipulation, many investors consider a company’s sales (revenue) figure a more reliable ratio component in calculating a stock’s price multiple than the earnings figure.
A lower P/S ratio is typically viewed as a better investment primarily because the investor is paying less for each unit of sales.
$6.15/ 2012 TTM Revenue Per Share
$6.15/ ($1,767 billion / 490.48 million)
The current revenue per share = $3.60
Based on the P/S comparing the current price of $6.15 to the 2012 TTM Revenue Per Share at $3.60 the price is stating that investors currently would be paying $1.71 for every dollar of sales.
The price-to-sales Ratio of 1.71 indicates that Sandridge investors are currently paying at $1.71 for every dollar in sales. This is currently below the industry average of 2.6.
3. Price to Tangible book Value
Price to Tangible Book Value = Share Price / [(Shareholders Equity - goodwill and intangibles)/Common Shares Outstanding]
Shareholders Equity 2011 = $1.626 billion
Goodwill and intangibles = $235 million
Tangible book value = $1.626 billion – $235 million
Tangible book value of $1.391 billion
Currently Sandridge Energy has a Tangible Book Value of $1.391 billion
Number of shares = 490.48 million
The tangible book value per share = $1.391 billion / 490.48 million
Stock Price as of December 4th 2012 = $6.15 / $2.84
Price to Tangible Book Value = 2.17
Currently Sandridge Energy is trading at 2.17x its tangible book value.
As a rule of thumb, stocks that trade at higher price to tangible book value ratios have the potential to leave investors with greater share price losses than those that trade at lower ratios. The tangible book value per share can reasonably be viewed as about the lowest price a stock could realistically be expected to trade at.
Currently, 2.17x tangible book is high for a take over of Sandridge Energy.
Based on the above criteria, Sandridge Energy would be a good take over target but is currently overvalued for a company to buy the company’s assets. Based on the valuations above a price in the $4.50 per share would be a very attractive valuation for a takeover.