Archrock

Archrock Inc earns a 3-star quantitative star rating, reflecting our opinion that this share class is a balanced choice, but prudent investors should consider looking elsewhere. The stock currently trades at a 5% discount to our quantitative fair value estimate of $31.61 per share; however, some caution is warranted due to this estimate's medium uncertainty rating.

The company's profitability strengthens our estimated valuation. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. For example, the firm's earnings yield of 6.1% falls in the top 40% compared with global peers. This suggests that it is generating substantial earnings relative to its share price, which contributes to our view that shares are cheap.

The company's favorable dividend structure is an additional encouraging factor. Dividends represent a stable form of future cash flows returned to shareholders, reducing the perceived risk of a business. The firm's dividend payout ratio of 46.1%, for example, ranks in the top 30% globally. This company's generous dividend payout ratio is a boon for shareholders seeking most of their returns in the form of dividends instead of share repurchases. This characteristic further promotes our favorable price/fair value ratio.

In addition to the aforementioned drivers, our model considers momentum as part of its comprehensive analysis. This share class has outperformed the broader universe over the past year. While we believe the stock is undervalued, this outperformance had a negative impact on our valuation estimate.

The narrow moat rating for this company indicates investors can expect it to generate 10 years or more of excess returns on capital due to its respectable competitive advantages. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.