Archaea Energy Inc. (LFG) in Canonsburg, Pa., is one of the largest renewable natural gas producers in the United States. Founded in 2018, the company owns and operates 23 landfill gas recovery and processing projects across 12 states.
Shares of LFG have gained 122.5% in price over the past year and 23.5% year-to-date, thanks to bullish investor sentiment surrounding clean energy stocks. However, given LFG’s limited growth prospects, the stock seems overvalued at its current price.
Based on the discounted cash flow model, LFG shares have an intrinsic value of $16.35. However, the stock is currently trading at $22.67, which is 38.7% higher than its intrinsic value. Also, the stock’s 17.17 trailing-12-month Price/Sales multiple is significantly higher than the 1.79 industry average.
Here is what could shape LFG’s performance in the near term:
Poor Financials
For its fiscal year ended Dec. 31, 2021, LFG’s total revenues and other income increased 1082.4% year-over-year to $77.13 million. The company generated $67.87 million in energy revenues. However, LFG’s operating loss worsened 760.8% from the same period last year to $23.56 million. This can be attributed to a 1178.6% rise in its total cost of sales and a 902.7% increase in general and administrative expenses.
EBT loss widened 1282.9% from its year-ago value to $30.92 million due to a $3.73 million loss on derivative contracts. And its net loss attributable to LFG worsened 658.3% year-over-year to $18.74 million. Its loss per share came in at $0.09.
Massive Debt Burden
LFG’s trailing-12-month long-term debt stands at $331.40 million. However, the company’s trailing-12-month levered free cash outflow amounted to $189.61 million. Its debt/free cash flow metric is negative 3.27. Its cash used in investing activities (excluding the acquisition of Aria) for the 12 months ended Dec. 31, 2021, came in at $242 million. In addition, the company’s trailing-12-month cash balance stands at $77 million.
Furthermore, LFG stated that its capital expenditures in its fiscal year 2022 are expected to range from $255 million to $285 million. Given the company’s negative cash flows and limited liquidity, LFG will most like borrow funds to finance its capital expenditures, thereby increasing its debt and interest burden significantly.
Mixed Growth Prospects
Analysts expect LFG’s revenues to rise 70.6% year-over-year to $332.10 million in its fiscal year 2022 (ending December 31, 2022). However, the $0.65 consensus EPS estimate for the current year reflects a 75.2% decline from the same period last year.
Nevertheless, the Street expects the company’s revenue and EPS to rise 41.2% and 107.1%, respectively, year-over-year to $468.85 million and $1.35 in its fiscal 2023.
POWR Ratings Reflect Bleak Prospects
LFG has an overall rating of F, which translates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
LFG has an F grade for Value and Quality. The stock’s negative 178.09 EV/EBITDA multiple justifies the Value grade. In addition, LFG’s negative profit margins are in sync with the Quality grade.
Among the 62 stocks in the F-rated Utilities – Domestic industry, LFG is ranked #61.
Beyond what I have stated above, view LFG ratings for Growth, Sentiment, Stability, and Momentum here.
Bottom Line
LFG has been gaining momentum over the past year, thanks to the increasing shift toward clean energy by nations worldwide and the ambitious net-zero emissions by 2050 goal of the United States. However, in the wake of Russia’s invasion of Ukraine and skyrocketing gas price inflation in the U.S., President Biden announced the release of more than 180 million barrels of oil from strategic reserves over the next few months, putting the clean energy goals on hold. As a result, demand for LFG’s products is expected to take a hit in the near term, negatively impacting its earnings. Thus, we think the overvalued stock is best avoided now.
How Does Archaea Energy (LFG) Stack Up Against its Peers?
While LFG has an F rating in our proprietary rating system, one might want to consider its industry peer, Brookfield Infrastructure Corp. (BIPC), which has a B (Buy) rating.
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REVISED: 2022 Stock Market Outlook
LFG shares were trading at $21.99 per share on Thursday afternoon, down $0.59 (-2.61%). Year-to-date, LFG has gained 20.30%, versus a -5.77% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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