RANGE RESOURCES CORP (NYSE:RRC): A Value Investing Opportunity with Strong Fundamentals

Value investing remains a time-tested strategy that involves identifying stocks trading below their intrinsic value, based on fundamental analysis. This approach, pioneered by Benjamin Graham and popularized by investors like Warren Buffett, emphasizes buying undervalued companies with strong financial health and profitability, while maintaining a margin of safety. One method to uncover such opportunities is by using screening tools that filter for stocks with favorable valuation metrics alongside decent growth, profitability, and financial health ratings. RANGE RESOURCES CORP (NYSE:RRC) recently surfaced through a "Decent Value" screen, which targets companies with a valuation rating above 7, coupled with reasonable scores in profitability, health, and growth, key pillars for value investors seeking undervalued yet fundamentally sound investments.

Valuation Metrics

RRC’s valuation metrics stand out as a primary reason for its appeal to value-oriented investors. The stock’s low price-to-earnings (P/E) ratio of 12.91 is notably cheaper than both the industry average and the S&P 500, indicating potential undervaluation. Further supporting this, its forward P/E ratio of 7.91 suggests the market may be pricing in overly pessimistic expectations. Key valuation highlights include:

• P/E ratio of 12.91, cheaper than 62.86% of industry peers.
• Forward P/E of 7.91, lower than 81.90% of companies in the same sector.
• PEG ratio, which accounts for growth, also points to an attractive valuation.

These metrics are crucial for value investing, as they help identify discrepancies between market price and intrinsic value, providing a potential margin of safety.

Profitability Assessment

Profitability is another area where RRC demonstrates strength, with a ChartMill Profitability Rating of 7 out of 10. The company has maintained positive earnings and operating cash flow over the past year, with a solid track record of profitability in four of the last five years. Its return on invested capital (ROIC) of 8.71% outperforms a significant portion of the industry, and profit margins are healthy:

• Profit margin of 17.10%, better than 70.48% of industry peers.
• Operating margin of 25.63%, above average for the sector.
• Gross margin of 90.46%, ranking in the top tier of the industry.

For value investors, strong profitability indicates a company’s ability to generate cash and sustain operations, reducing the risk associated with undervalued stocks.

Financial Health

RRC’s financial health presents a mixed but overall acceptable picture, scoring 5 out of 10. The company exhibits good solvency, with a debt-to-equity ratio of 0.29, indicating low dependency on debt financing, and a debt-to-free-cash-flow ratio of 2.39, suggesting it can manage its obligations comfortably. However, liquidity is a concern, with current and quick ratios below 1, which may pose short-term challenges. Key points include:

• Debt-to-equity ratio of 0.29, better than 62.38% of industry peers.
• Altman-Z score of 2.17, indicating limited bankruptcy risk.
• Low liquidity ratios, which warrant monitoring but are mitigated by strong cash flow.

Financial health is vital in value investing, as it ensures the company can withstand market downturns and avoid value traps.

Growth Prospects

Growth is an area where RRC shows moderate promise, with a ChartMill Growth Rating of 5 out of 10. While revenue has seen slight declines over the past year and five-year average, earnings per share (EPS) have grown impressively, and future estimates are encouraging. The company is expected to rebound with stronger revenue growth in the coming years. Highlights include:

• EPS growth of 24.11% over the past year and 42.73% on average in recent years.
• Expected revenue growth of 13.63% annually moving forward.
• Positive EPS growth projections of 8.87% for the future.

For value investors, growth potential adds upside to undervalued stocks, as it can drive future price appreciation closer to intrinsic value.

Conclusion

RRC appears to align well with the principles of value investing, offering an attractive valuation relative to its fundamentals. Its strong profitability, reasonable financial health, and promising growth outlook suggest it may be undervalued by the market. However, investors should consider the company’s liquidity constraints and industry cyclicality when evaluating the opportunity. For those interested in exploring similar undervalued stocks, further results can be found using the Decent Value stock screen. For a detailed analysis of RRC’s fundamentals, review the full fundamental report here.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.