How are energy investors positioned?
On Monday, BofA Securities adjusted its stance on Argo Group International Holdings (NYSE:ARGO), shifting from a Buy to a Neutral rating. The firm also reduced the price target from $15.50 to $12.00. The stock, currently trading at $0.07, has shown resilience with a 31.25% gain year-to-date, though InvestingPro analysis suggests the stock is currently overvalued based on its proprietary Fair Value model. The revision came amid expectations of flat earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year 2025. BofA Securities anticipates Argo Group’s EBITDA to be around $447 million, which is an 8% decrease from their previous forecast, primarily due to weaker crop results. These results stem from lower-than-expected yields and increased costs, particularly in labor.
The report noted that despite the resilience of sugar and ethanol prices, the potential for stock price growth from current levels appears more limited. Consequently, the new price target reflects a 4.4 times enterprise value to EBITDA (EV/EBITDA) multiple for the year 2025, which represents a premium compared to the industry average of approximately 3.5 times. According to InvestingPro data, Argo’s current EV/EBITDA stands at 0.48, with the company reporting an EBITDA of -$11.6M in the last twelve months.
BofA Securities justified the downgrade by pointing to Argo Group’s stock trading at a premium to its peers and revised down the target EV/EBITDA multiple to 3.5 times from the previous 4.0 times. This adjustment aligns with the historical average for the sector. Furthermore, the firm’s weighted average cost of capital (WACC) assumption remains at 14.7%. InvestingPro’s comprehensive analysis shows a Financial Health Score of 2.4, indicating FAIR condition, with additional metrics and valuation insights available to subscribers.
The downgrade also reflects a change in the income rating to 8, indicating expectations of the same or lower earnings, from the previous rating of 7, which suggested the same or higher earnings. The report underlines limited upside potential for the stock, especially after a recent rally following news that Tether Investments expressed interest in increasing its position. Tether Investments currently holds a 19.6% stake and aims to acquire a controlling stake at a price of $12.40 per share.
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