EOG Resources (NYSE:EOG) Passes the Peter Lynch GARP Investment Test

The investment philosophy of Peter Lynch, famous manager of the Fidelity Magellan Fund, focuses on locating well-run companies with lasting growth that sell at sensible prices. This "growth at a reasonable price" (GARP) method sidesteps speculative, expensive stocks for businesses with sound basics that an investor can grasp and keep for many years. A primary instrument for locating these chances is a stock filter constructed using Lynch's particular financial measures, which emphasize earnings, financial soundness, and price.

One firm that recently appeared from this filter is EOG RESOURCES INC (NYSE:EOG). As a large participant in the exploration and production of crude oil and natural gas, EOG works mainly in important U.S. basins such as the Permian and Eagle Ford. On initial look, it matches the Lynch model of a firm in a needed, if ordinary, field, a "simple" business that supplies basic goods.

How EOG Matches the Peter Lynch Measures

The heart of Lynch's plan involves sorting for firms with good but lasting growth, high earnings, a clear balance sheet, and a good price. EOG's present numbers match these ideas closely.

• Lasting Earnings Growth: Lynch looked for firms with a 5-year earnings per share (EPS) growth between 15% and 30%, quick enough to be interesting but not so fast as to be unstable. EOG's 5-year EPS growth rate of 18.45% rests well inside this goal area, showing a record of consistent, controlled increase.
• Good Price via PEG Ratio: Maybe the most well-known Lynch number is the Price/Earnings to Growth (PEG) ratio, which tries to find stocks priced fairly compared to their growth. Lynch preferred a PEG of 1 or below. EOG's PEG ratio, using its past growth, is about 0.53, hinting the market might be pricing its historical growth path too low.
• Strong Earnings (ROE): Return on Equity (ROE) shows how well a firm creates profits from shareholder equity. Lynch wanted an ROE above 15%. EOG's ROE of 18.26% not only meets this line but also places high within its industry group, pointing to capable management and a lasting competitive spot.
• Careful Financial Soundness: A solid balance sheet was essential for Lynch. He liked firms funded more by equity than debt, often aiming for a Debt-to-Equity ratio below 0.25.
  • EOG's Debt-to-Equity ratio of 0.25 meets this strict goal, showing a very careful capital setup.
  • Also, its Current Ratio of 1.62 is above Lynch's lowest need of 1, showing enough cash to meet near-term duties.

A Broad Basic View

A wider basic study of EOG supports the image shown by the Lynch filter. The firm gets a good total basic rating, with specific good points in two important areas Lynch stressed: earnings and financial soundness.

• Earnings Leader: EOG grades very well on earnings numbers. Its profit margin above 24% and operating margin over 33% are with the top in its field. The firm has also shown good gain in these margins in recent years.
• Firm Balance Sheet: The soundness grade is just as good. The firm's small debt level is clear, and important solvency numbers like the Altman-Z score and Debt-to-Free-Cash-Flow ratio show very small failure risk and better financial might compared to field peers.
• Sensible Price & Shareholder Rewards: From a price view, EOG sells at a P/E ratio near 9.9, which is seen as fair and is less costly than most of both its field rivals and the wider S&P 500. The firm also gives capital back to shareholders via a dividend that has increased at a strong yearly rate above 29% in recent years, backed by a lasting payout ratio.

The primary zone of care, and a topic for more study as Lynch would suggest, is in the growth view. While past growth has been good, recent yearly EPS and income have fallen, and future growth guesses are more limited. This situation is what makes the Lynch filter's stress on the PEG ratio so fitting, it helps find firms where the market price may not completely show a solid historical record of results. You can see the full basic details for EOG here.

Conclusion

For investors who follow the Peter Lynch philosophy of long-term, basics-led investing, EOG Resources offers an interesting example. It comes from a Lynch-based filter not as a showy story stock, but as a financially strict operator in a basic field. The firm meets the main needs of lasting historical growth, high earnings, very good financial soundness, and a fair price. While future goods prices and output levels will always affect results, EOG's good basic base matches the kind of business Lynch suggested keeping for the long term.

Want to locate other firms that match this description? You can use the Peter Lynch stock filter yourself to see the present list of passing stocks by going to this link.

Disclaimer: This article is for information and learning only and is not investment guidance, financial advice, or a suggestion to buy or sell any security. The study uses data and a particular investment plan model, it is not a replacement for your own research or talk with a skilled financial expert. Investing has risk, including the chance of loss of original funds.