A Close Look at the Fair Value of ATCO (TSX:ACO.X)

Analysts price ATCO Ltd. (TSX:ACO.X) at around $55 per share, but is that fair?

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In a mess of energy companies sinking further and further in a slumping industry, there are few out there still looking at a reasonably positive return through share price.

Yet one of the diamonds in the rough is ATCO Ltd. (TSX: ACO.X), a diverse energy company that provides gas, electricity, construction, and logistics to each of these industries.

Year to date, the stock is up about 14% to $44.13 per share as of writing. Over the short term at least, analysts are quite bullish about the prospects of this stock, given its diverse operations.

In the next 12 months, analysts have given a potential upside of 25% for this stock to as high as $55 per share.

But what about the long-term potential for a stock like ATCO? Is it merely doing well because oil and gas isn’t, or is there really enough for investors to get behind this company?

First, let’s dig into the company’s past. In the last 20 years, ATCO has been steadily growing as a company. In that time, the share price has risen about 325%, which is definitely a strong number.

The peak share price the company has hit in that time is about $55 per share, which you’ll recall is where analysts predict the stock could end up moving toward in the next year.

Much of its recent growth has come through both organic growth as well as growth by acquisition over the last several years. As the company is in a wide range of industries, that leaves those industries available and ripe for the picking.

It doesn’t look to be ending anytime soon, as ATCO has set aside $343 million in capital growth projects, and “$34 million in other projects that would include further acquisitions.”

However, some investors worry that these acquisitions are costing the company – literally. ATCO has about $11 billion in debt — a price that can’t be covered by its $5.06 billion market cap and $1.1 billion in cash flow.

However, analysts believe the company’s acquisitions will help pay down these debts fast, and should continue to grow the company’s cash flow over the long term. That’s where we can really dig into ATCO’s fair value.

If we’re going to assume that the company will continue to grow at a relatively strong rate over the next decade, then we need to take that into consideration when looking at ATCO.

After all, the oil and gas industry won’t be down forever, and a company like ATCO could soar after it rebounds given that its diverse operations are already holding it higher than most.

So, in the last decade, ATCO’s share price has risen by 106%. That would bring today’s share price of $44.13 to $93.56 per share. With all these acquisitions, ATCO could swell in share price as the company brings in more stable cash flow.

Foolish takeaway

So is a $55 share price a fair value? Frankly, I think that’s too low. The stock already reached this price once a few years ago, and with so many acquisitions lined up, that fair value price should be higher.

The company’s free cash flow should skyrocket over the next decade, and when it does, the company’s debts will be quickly paid off.

Therefore, I would put the price of ATCO much higher. If we put ATCO where it should be according to analysts at $55 per share, then in the next decade, the share price could be at around $115 per share, rather than $93.56.

Taking a slumping market, future growth operations, and a diverse company into consideration, I believe this price is still too low and would put ATCO closer to $65 per share as a fair value target based on future prospects.

That’s a potential upside of 40%, which in a decade could be worth $137.80 per share.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.

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