Range Resources trades at $40.01 per share and has stayed right on track with the overall market, gaining 11.2% over the last six months. At the same time, the S&P 500 has returned 11.8%.
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Why Is Range Resources Not Exciting?
We’re passing on Range Resources for now. Here are two reasons why RRC doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Over the last five years, Range Resources grew its sales at a mediocre 8.6% compounded annual growth rate. This fell short of our benchmark for the energy upstream and integrated energy sector.
2. Shrinking EBITDA Margin
Adjusted EBITDA margin is an important measure of profitability for the sector and accounts for the gross margins and operating costs mentioned previously. Unlike operating margin, it is not distorted by accounting conventions around reserves, drilling costs, and assumptions on commodity consumption from the well or basin. Adjusted EBITDA highlights the economic reality of how much cash the rock produces before the capital structure (debt service) and the drilling budget (capex) are considered.
Looking at the trend in its profitability, Range Resources’s EBITDA margin decreased by 5.1 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its EBITDA margin for the trailing 12 months was 50.5%.
Final Judgment
Range Resources isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 10.6× forward P/E (or $40.01 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We’re pretty confident there are superior stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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