Rating Update: Stock Rating C-Low Neutral (3/31/20)-Dorchester Minerals LP (DMLP).

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BUSINESS

Dorchester Minerals, L.P. engages in the acquisition, ownership, and administration of producing and nonproducing natural gas and crude oil royalty, net profits, and leasehold interests in the United States. The company’s royalty properties consist of producing and nonproducing mineral, royalty, overriding royalty, net profits, and leasehold interests located in 574 counties and parishes in 25 states; and net profits interests represent net profits overriding royalty interests in various properties owned by the operating partnership. Dorchester Minerals Management LP serves as the general partner of Dorchester Minerals, L.P. The company was founded in 1982 and is based in Dallas, Texas.
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INVESTMENT RATING

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DMLP’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.

Dorchester Minerals has a current Value Trend Rating of C (Low Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Dorchester Minerals has a good Appreciation Score of 76 but a poor Power Rating of 18, with the Low Neutral Value Trend Rating the result.

Dorchester Minerals’ stock is selling well below targeted value. The current stock price of $9.31 compares to targeted value 12 months forward of $23.
Dorchester Minerals’ high appreciation potential results in an appreciation score of 76 (only 24% of the universe has greater appreciation potential.)
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Dorchester Minerals has a Power Rating of 18. (This poor Power Rating indicates that DMLP only has a better chance of achieving attractive investment performance over the near to intermediate term than 18% of companies in the universe.)
Factors contributing to this poor Power Rating include: is in an extremely unfavorable position current; and recent price action has been unfavorable.

INVESTMENT PROFILE

DMLP’s financial strength is low. Financial strength rating is 28.
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Relative to the S&P 500 Composite, Dorchester Minerals LP has slightly more Growth than Value characteristics; its appeal is likely to be to Income-oriented investors; the perception is that DMLP is normal risk. Relative weaknesses include: low financial strength, low historical growth, and high earnings variability. DMLP’s valuation is low: high dividend yield, low P/E ratio, and moderate price/book ratio. DMLP has unusually low market capitalization.

CURRENT SIGNALS

Dorchester Minerals’ current operations are strong. Return on equity is rising, reflecting: and improving asset utilization.

Dorchester Minerals’ current technical position is very weak. The stock price is in a 2.3 month down move. The stock has declined 35.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend. Dorchester Minerals’ stock price decline is extreme and the stock appears oversold.

ALERTS

Recent meaningful negative changes in investment behavior have impacted Dorchester Minerals LP (NASDAQ: DMLP): negative upside/downside volume developed.
Dorchester Minerals LP (NASDAQ: DMLP) has recently enjoyed marginal positive changes in fundamentals: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
On 3/31/20, Dorchester Minerals LP (NASDAQ: DMLP) stock enjoyed a major increase of 10.2%, closing at $17.93. However, below average trading volume at 76% of normal accompanied the advance. Relative to the market the stock has been weak over the last nine months but has risen 2.1% during the last week.

CASH FLOW

In 2019, Dorchester Minerals experienced a significant decline in cash of -$2.95 million (-16%). Sources of cash were lower than uses. Cash generated from 2019 EBITDA totalled +$66.07 million. 2019 non-operating sources contributed no cash. In 2019, there were no cash taxes paid. Re-investment in the business amounted to -$44.43 million (-67% of EBITDA). On a net basis, debt investors supplied +$2.49 million (+4% of EBITDA) while equity investors received -$27.08 million (-41% of EBITDA).
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Dorchester Minerals’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Dorchester Minerals Lp Peer Group as well. In most years, Dorchester Minerals was in the second quartile and third quartile. Currently, Dorchester Minerals is slightly above median at 0% of EBITDA ( $0.00 million).

Dorchester Minerals’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Dorchester Minerals Lp Peer Group as well. In most years, Dorchester Minerals was in the top quartile. Currently, Dorchester Minerals is at the upper quartile at 0% of EBITDA ( $0.00 million).

Dorchester Minerals’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Dorchester Minerals Lp Peer Group. In most years, Dorchester Minerals was in the second quartile and top quartile. Currently, Dorchester Minerals is below median at -67% of EBITDA (-$44.43 million).

Dorchester Minerals’ Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Dorchester Minerals Lp Peer Group. In most years, Dorchester Minerals was in the second quartile. Currently, Dorchester Minerals is below median at +4% of EBITDA (+$2.49 million).

Dorchester Minerals’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Dorchester Minerals Lp Peer Group. In most years, Dorchester Minerals was in the third quartile and second quartile. Currently, Dorchester Minerals is above median at -41% of EBITDA (-$27.08 million).

Dorchester Minerals’ Change in Cash, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Dorchester Minerals Lp Peer Group. (Since 2017 Change in Cash, %EBITDA has experienced a very sharp decline.) In most years, Dorchester Minerals was in the second quartile and third quartile. Currently, Dorchester Minerals is slightly below median at -4% of EBITDA (-$2.95 million).
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Dorchester Minerals’ Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Dorchester Minerals Lp Peer Group. In most years, Dorchester Minerals was in the lower quartile and third quartile. Currently, Dorchester Minerals is lower quartile at +19%.

PROFITABILITY

DMLP’s return on equity has improved very significantly since 2010 but it experienced a very sharp decline after the 2018 high.
This very significant improvement was due to very strong positive trend in pretax operating return and little change in non-operating factors.
The productivity of DMLP’s assets rose over the full period 2010-2019: asset turnover has enjoyed a very strong overall uptrend although it experienced a very sharp decline after the 2018 high.
Reinforcing this trend, pretax margin has exhibited a volatile overall uptrend that sharply accelerated from the 2015 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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DMLP’s return on equity is slightly above median (47.0%) for the four quarters ended December, 2019.
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Operating performance (pretax return on assets) is upper quartile (45.1%) reflecting asset turnover that is above median (0.67X) and upper quartile pretax margin (67.0%).
Tax “keep” rate (income tax management) is at the upper quartile (100.0%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.04X).

GROWTH RATES

There are no significant differences between Dorchester Minerals LP’s longer term growth and growth in recent years.
Dorchester Minerals LP’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 0.4% per year. (More recently it has been 20.0%.)

Total asset growth has been -4.4% per year. (More recently it has been 12.4%.)

Annual E.P.S. growth has been 1.7% per year. (More recently it has been 30.2%.)

Equity growth has been -4.7% per year. (More recently it has been 11.4%.)
No consensus growth rate forecast is available for Dorchester Minerals LP.
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Relative to the Dorchester Minerals Lp Peer Group, Dorchester Minerals’ historical growth measures are generally third quartile. Total asset growth (-4.4%) has been substantially below median. Revenue growth (0.4%) has been at the lower quartile. E.P.S. growth (1.7%) has been at the lower quartile. Equity growth (-4.7%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Dorchester Minerals LP’s stock price performance has been variable and significantly below market. Between May, 2009 and March, 2020, Dorchester Minerals LP’s stock price fell -55%; relative to the market, this was a -84% loss. Significant price moves during the period: 1) December, 2019 – March, 2020: -52%; and 2) July, 2014 – February, 2016: -72%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -43.5% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through March, 2020 of -43.5% is lower quartile relative to Dorchester Minerals LP Peer Group.

Current 5-year total return performance of -9.4% is lower quartile relative to the S&P 500 Composite.
Through March, 2020, with lower quartile current 5-year total return of -9.4% relative to S&P 500 Composite, Dorchester Minerals’ total return performance is substantially below median relative to Dorchester Minerals LP Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, DMLP’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is upper quartile. Ratio of enterprise value/revenue is above median. Price/equity ratio is slightly above median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
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Dorchester Minerals has a major value gap compared to median valuation. For DMLP to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 3.93X to 1.76X. If DMLP’s ratio of enterprise value/revenue were to decline to 1.76X, its stock price would be lower by $-5 to $4.
For DMLP to achieve upper quartile valuation relative to the Dorchester Minerals LP Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.93X to 5.24X. If DMLP’s ratio of enterprise value/revenue were to rise to 5.24X, its stock price would increase by $3 from the current level of $9.31.

VALUE TARGETS

DMLP’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a major Value Builder.
Dorchester Minerals LP’s current Price Target of $25 represents a +172% change from the current price of $9.31.
This high appreciation potential results in an appreciation score of 76 (only 24% of the universe has greater appreciation potential.)
Notwithstanding this high Appreciation Score of 76, the low Power Rating of 18 results in an Value Trend Rating of C.
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Dorchester Minerals LP’s current Price Target is $25 (+49% from the 2019 Target of $17 and +172% from the 03/31/20 price of $9.31). This dramatic rise in the Target is the result of a +14% increase in the equity base and a +31% increase in the price/equity multiple. The forecasted decline in return on equity has a slight negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 34.4% — slightly below our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2011 and 2019. The current forecast is significantly above the 2015 low of 16%.

PTR’s growth forecast is 12.0% — above our recent forecasts. Forecasted growth exhibited a slight, erratic decline between 2011 and 2019. The current forecast is significantly above the 2018 low of 2%.

PTR’s cost of equity forecast is 13.6% — in line with recent levels. Forecasted cost of equity suffered a dramatic, erratic increase between 2011 and 2019. The current forecast is above the 2015 low of 8.9%.
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At Dorchester Minerals LP’s current price of $9.31, investors are placing a negative value of $-2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 4.0% per year, and a return on equity of 37.5% versus a cost of equity of 12.7%.
PTR’s 2021 Price Target of $25 is based on these forecasts and reflects an estimated value of existing assets of $9 and a value of future investments of $17.

About John Lafferty 98354 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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