Kosmos Energy has been on fire lately. In the past six months alone, the company’s stock price has rocketed 73.6%, reaching $2.90 per share. This run-up might have investors contemplating their next move.
Is now the time to buy Kosmos Energy, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Kosmos Energy Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Kosmos Energy. Here are three reasons we avoid KOS and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Cyclical sectors like Energy often flatter weaker operators during favorable price environments, but a longer-term lens separates those from businesses that can consistently perform across market cycles. Regrettably, Kosmos Energy’s sales grew at a mediocre 9.9% compounded annual growth rate over the last five years. This was below our standard for the energy upstream and integrated energy sector.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Kosmos Energy’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10%, meaning it lit $10.00 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Kosmos Energy burned through $180.4 million of cash over the last year, and its $3.05 billion of debt exceeds the $91.52 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Kosmos Energy’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Kosmos Energy until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Kosmos Energy isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 12.2× forward P/E (or $2.90 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
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