Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Occidental Petroleum fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Occidental Petroleum Corporation (Occidental) conducts its operations through various subsidiaries and affiliates. The Company operates in three segments: oil and gas segment; chemical segment, and midstream, marketing and other segment. The oil and gas segment explores for, develops and produces oil and condensate, natural gas liquids (NGLs) and natural gas. The chemical segment (OxyChem) mainly manufactures and markets basic chemicals and vinyls. The midstream, marketing and other segment (midstream and marketing) gathers, processes, transports, stores, purchases and markets oil, condensate, NGLs, natural gas, carbon dioxide (CO2) and power. It also trades around its assets, including transportation and storage capacity, and trades oil, NGLs, gas and other commodities. The segment also invests in entities that conduct similar activities. On December 31, 2012, it acquired Eagle Ford Shale.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$95.54|
|Value Based on 0% Growth||$56.00|
|Market Implied Growth Rate||3.12%|
|Net Current Asset Value (NCAV)||-$16.85|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Occidental Petroleum is a company that Defensive Investors and Enterprising Investors should all keep on their watch lists. The company qualifies for the Defensive Investor having passed all of the investor type’s requirements except the current ratio. The company also qualifies for the Enterprising Investor by default, despite having a high level of debt relative to its current assets. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors, including a review of both ModernGraham’s valuation of Chevron Corporation (CVX) and ModernGraham’s valuation of Exxon Mobil (XOM). From a valuation perspective, the company appears to be slightly overvalued. It has grown its EPSmg (normalized earnings) from $5.74 in 2009 to $6.59 for 2013, but this level of growth does not support the market’s implied estimate of 3.12% earnings growth. The ModernGraham valuation model accordingly returns an estimate of intrinsic value that falls below the market’s current price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Occidental Petroleum (OXY)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: The author did not hold a position in Occidental Petroleum (OXY) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.