Shareholders of Liberty Energy would probably like to forget the past six months even happened. The stock dropped 29.1% and now trades at $19.62. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Liberty Energy, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Liberty Energy Not Exciting?
Even though the stock has become cheaper, we’re sitting this one out for now. Here are two reasons we avoid LBRT, plus one stock we’d rather own.
1. Low Gross Margin Reveals Weak Structural Profitability
In any given year, energy gross margins are heavily influenced by prices, hedging, and cost inflation, but over a full cycle these gross margins reveal which producers are structurally advantaged through superior “rock” quality, infrastructure access, and cost position.
Liberty Energy, which averaged 23.3% gross margin over the last five years, exhibited bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Liberty Energy has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 1.9%, below what we’d expect for an upstream and integrated energy business.
Final Judgment
Liberty Energy isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 85.4× forward P/E (or $19.62 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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