Interesting TPL made the list for best $SPX performer over 5,10,15 & 20 year period. I thought the tangible assets would be quite high but AI Perplexity say those are only worth $52.48/share.
Wonder why TPL is such a compelling investment. Perplexity says this:
Texas Pacific Land Trust (TPL) is compelling as a top S&P 500 performer over 5, 10, 15, and 20-year periods for several reasons beyond valuation:
- Asset Ownership and Revenue Streams: TPL owns about 880,000 acres in the Permian Basin, one of the most prolific oil and gas regions globally. Their revenue bases on oil and gas royalties, land leases, and produced water royalties create diverse and resilient cash flows. The recent expansion into water services with produced water desalination represents a growing revenue segment aligned with industry trends of water management in fracking.?
- Profitability and Margins: TPL has extremely high margins with 2024 data showing about 85% gross profit margin, 70% operating margin, and 55% net profit margin, reflecting an asset-light model with little commodity price risk and strong operational control. These margins greatly exceed typical energy industry peers, contributing to robust free cash flow generation.?
- Growth Opportunities: The company benefits from continued drilling activity in the Permian Basin on its acreage, an increase in well permits, drilled but uncompleted wells (DUCs), and expansion of water infrastructure projects. These growth drivers create increasing royalty and water sales revenue potential over the medium and long term.?
- Financial Strength: TPL's debt-free balance sheet and large cash reserve ($600M+ in cash and investments) provide financial flexibility, allowing it to invest in growth projects and sustain dividends even in commodity price downturns. This stability supports consistent dividend payments and stock repurchases, enhancing shareholder returns.?
- Market Position and Risk Profile: The diversity of income streams from royalties, water, and surface leases, plus ownership of unique land and mineral rights, provides a moat. Unlike typical oil producers, TPL's income isn't based on production costs or commodity price directly but on royalties, which offers downside protection during price volatility.?
- Valuation Context: Despite a high current price and a five-year DCF value of approximately $229/share, the premium valuation reflects the quality, growth prospects, and resilience of cash flows. The premium is partially justified by the low-risk, high-margin business model and substantial financial strength, which can compound value over long periods.?
In summary, TPL's compelling investment case is built on its dominant land ownership in a key energy-producing region, high and sustainable profitability margins, diversified and growing revenue streams including innovative water services, a very strong balance sheet, and a business model that generates steady cash flows relatively insulated from commodity price swings. These factors provide a foundation for superior long-term performance in the S&P 500 beyond just valuation metrics.?
This comprehensive set of unique qualitative and quantitative factors explains why TPL could be a top performer in 5 to 20-year horizons despite a high valuation by conventional DCF standards.
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The top 3 metrics justifying buying Texas Pacific Land Trust (TPL) at the current price (~$943/share) are:
- Strong Earnings Per Share (EPS): TPL reported an EPS of about $20.09, indicating substantial profitability relative to the stock price. This reflects a very high level of earnings generation per share, supporting the stock’s valuation despite a high price-to-earnings ratio of ~47.?
- Robust Free Cash Flow: For the first half of 2025, TPL generated free cash flow of approximately $256.6 million, reflecting the company's ability to convert earnings to cash efficiently. Strong free cash flow underpins dividend payments and potential share repurchases, enhancing shareholder returns.?
- High Profit Margins and Operating Income: TPL operates with high operating margins (about 70%+), allowing the company to earn substantial operating income ($293.8 million in a recent quarter) on relatively low expenses. This demonstrates an efficient, asset-light business model with consistent profitability.?
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