What a fantastic six months it’s been for Atlas Energy Solutions. Shares of the company have skyrocketed 59.6%, hitting $16.65. This run-up might have investors contemplating their next move.
Is there a buying opportunity in Atlas Energy Solutions, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Atlas Energy Solutions Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons you should be careful with AESI, plus one stock we’d rather own.
1. Fewer Distribution Channels Limit Its Ceiling
The size of the revenue base is a way to assess topline, and it tells an investor whether an Energy producer has crossed the line between being a more vulnerable commodity taker and a durable operating platform. Scaled businesses tend to produce and generate revenue from many wells, pads, takeaway routes, and geographies, not just a single field or drilling program.
Atlas Energy Solutions’s $1.06 billion of revenue in the last year is pretty small for the industry, suggesting the company is a subscale business in an industry where scale matters.
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.
Analyzing the trend in its profitability, Atlas Energy Solutions’s EBITDA margin decreased by 29.6 percentage points over the last year. Even though its historical margin was healthy, shareholders will want to see Atlas Energy Solutions become more profitable in the future. Its EBITDA margin for the trailing 12 months was 16.5%.
3. Cash Burn Ignites Concerns
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.
Atlas Energy Solutions’s demanding reinvestments have consumed many resources over the last five years, contributing to an average free cash flow margin of negative 2.6%. This means it lit $2.59 of cash on fire for every $100 in revenue.
Final Judgment
Atlas Energy Solutions falls short of our quality standards. Following the recent rally, the stock trades at 11× forward EV-to-EBITDA (or $16.65 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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