Lets look at Canadian Natural Resources (CNQ) today.
This posting is open for discussion and to determine the entry and exit price points by using 3 different methods. These three methods use the historical P/E, CF/S and the dividend (D/S) ratios but there are a number of ratios available.
Definitions of the following terms used:
P/E or price divided by its earnings. Shows what multiple that a investor is willing to pay for $1 dollar of earnings.
http://http:www.investopedia.com/terms/p/price-earningsratio.asp#axzz1ywxwNlkP
CF/S or cash flow per share. This is the same as earnings except that its referring to the company’s ability to generate cash.
http://www.investopedia.com/terms/c/cashflowpershare.asp#axzz1ywxwNlkP
D/S or dividend per share. For this ratio you would use the dividend yield formula.
http://www.investopedia.com/university/ratios/investment-valuation/ratio7.asp#axzz1ywxwNlkP
Using these historical ratios a person can estimate what the stock price range should be.
By comparing the 3 year average vs a longer term (10 year average or more) can also help to determine where the market believes the company is in its life cycle, which includes: start up (venture), growth or mature company.
CNQ trades on the TSX and on the NYSE and has been a publicly traded company for more than 10 years. CNQ is a Oil and gas exploration company with operations in Canada, the North Sea and in Africa.
Starting with CF/S. CNQ has had a 15 year average annual CF/S growth rate of 32.97% and 25% average over the last 3 year period. CNQ also had for the past 15 years, an average P/CF trading range of 9.3 (high) and 4.8 (low) with some wild swings in the past. P/CF values in 1996 as CNQ had a high P/CF ratio of 18.24 and a really low P/CF ratio in the year 2003 at 1.77.
By estimating future CF/S one can estimate future share price. In this case CNQ should earn about $6.3 in 2012 and using the average CF/S the estimated trading range should be $58.60 (high) and $30.52 (low)
What about dividend growth? CNQ has had growth in this area as well.
CNQ has increased its dividends by about 29% annually in the past decade and 22.6% annually over the last 3 years. There is no indication that CNQ won’t continue to be paying out more dividends going forward.
For years CNQ had bounced around the 1% mark as a dividend percentage.
It is estimated that CNQ will increase its dividend again in 2012 to .40 from .36 (2011).
CNQ’s 3 year yield range is .64 (high) and 1.28(low) and its 10 year average range of .62(high and 1.21(low)
The Dividend should support a share price of $55.90 (high) and $28.14 (low). Current price of $27.76 and a yield of 1.512%, puts it into the buy range.
Looking from the P/E side. CNQ for the past 15 years has had an average P/E trading range of 19.91 (high) and 9.85 (low). However if we look at the past 3 years the averages have increased showing a 23.51 (high) and 10.88 (low)
So looking at the price range CNQ should earn about $2.24 in 2012 which is 20% higher than 2011. By using the average P/E the estimated trading range should be $62.90 (high) and $35.94 (low)
At todays price of $27.76 it looks like a buy !
Sum up; Current price $27.76
P/E, low estimated price $35.94
D/P, support price is $28.14
CF/S support price is $30.52
　
How to trade? If I’m looking to purchase CNQ I’ll be writing a put at my price estimate. In this case I’m looking to write the Put Option at $36 on the CBOE . It would be best to sell the put for as short a term as possible. So I’m looking to sell the March 2012 put at 36 for .75 per share.
Return on cash? For the next 25 days til its expiry will net you 2.08% per share.