An Intrinsic Calculation For Archrock, Inc. (NYSE:AROC) Suggests It's 40% Undervalued

Archrock, Inc. (NYSE: AROC), a leading provider of natural gas compression services in the United States, has been making significant strides in its financial performance and strategic transformation. However, the market seems to have overlooked the company's potential, leading to an undervalued stock price. An intrinsic calculation based on Archrock's fundamentals suggests that the company is approximately 40% undervalued.



Archrock's strategic transformation, which includes divesting small, non-strategic compressors and focusing on large horsepower units, has significantly improved its earnings power and intrinsic value. This transformation has increased the proportion of large horsepower units in its fleet to 84%, enhancing the company's profitability and competitive position. Additionally, Archrock's record utilization and pricing have further boosted its profitability, contributing to its intrinsic value.

Archrock's strong financial performance is evident in its revenue and earnings growth. In 2023, the company's revenue increased by 17.12% compared to the previous year, while earnings grew by an impressive 140.56%. This growth demonstrates Archrock's ability to generate profits from its increased revenue and highlights the company's potential for future earnings growth.



Archrock's market leadership and dominance in the natural gas compression industry contribute significantly to its intrinsic value. The company's extensive market share and stable customer base provide a solid foundation for its revenue stream and growth potential. Archrock's focus on helping its customers manage emissions also positions it well in the current market environment, where reducing greenhouse gas emissions is a priority. This focus further enhances Archrock's competitive position and intrinsic value.

Archrock's valuation multiples, such as its P/E ratio, forward P/E, P/S ratio, EV/EBITDA, EV/EBIT, EV/OCF, EV/FCFE, and EV/IC, suggest that the company is undervalued compared to its peers and historical averages. For instance, Archrock's P/E ratio of 30.44 is lower than the industry average, indicating that the market may be undervaluing the company's growth potential.

Archrock's dividend payout and growth potential are also key factors in determining its intrinsic value. The company pays an annual dividend of $0.70, which amounts to a dividend yield of 2.52%. While the dividend payout ratio is 76.57%, indicating that Archrock is paying out a significant portion of its earnings as dividends, the company's strong earnings growth suggests that it can maintain and even increase its dividend payout in the future. This growth potential further enhances Archrock's intrinsic value.

In conclusion, an intrinsic calculation based on Archrock's fundamentals, strategic transformation, market leadership, valuation multiples, and dividend payout suggests that the company is approximately 40% undervalued. Investors who recognize Archrock's potential and invest in the company's stock at its current price may benefit from significant upside as the market corrects its undervaluation. However, it is essential to consider other factors, such as the company's debt levels, dividend coverage, and potential risks, when making investment decisions.