Oil & Gas Stocks

Phillips 66 Valuation – August 2016 $PSX

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 or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  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 stock analysis showing a specific look at how Phillips 66 (PSX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining and marketing, and specialties businesses. The Company operates its business through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment includes its equity investment in DCP Midstream , LLC (DCP Midstream) and its investment in Phillips 66 Partners LP. The Midstream segment consists of three business lines: Transportation, DCP Midstream and NGL. The Midstream segment also transports crude oil and other feedstocks to refineries and other locations, and delivers refined and specialty products to market, and provides storage services for crude oil and petroleum products. The Chemical segment manufactures and markets petrochemicals and plastics. The refining segment buys, sells and refines crude oil and other feedstocks into petroleum products. The M&S segment purchases for resale and markets refined petroleum products.

PSX Chart

PSX data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of PSX – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $41,614,811,700 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.22 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 61133.33% Pass
6. Moderate PEmg Ratio PEmg < 20 13.84 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.84 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.22 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.27 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

PSX value chart August 2016

EPSmg $5.73
MG Growth Estimate 15.00%
MG Value $220.68
Opinion Undervalued
MG Grade C
MG Value based on 3% Growth $83.11
MG Value based on 0% Growth $48.72
Market Implied Growth Rate 2.67%
Current Price $79.33
% of Intrinsic Value 35.95%

Phillips 66 does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, and the poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.16 in 2012 to an estimated $5.73 for 2016. This level of demonstrated earnings growth outpaces the market’s implied estimate of 2.67% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Phillips 66 revealed the company was trading above its Graham Number of $47.65. The company pays a dividend of $2.31 per share, for a yield of 2.9%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 13.84, which was below the industry average of 55.24, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-28.01.

Phillips 66 receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

PSX charts August 2016

Net Current Asset Value (NCAV) -$28.01
Graham Number $47.65
PEmg 13.84
Current Ratio 1.22
PB Ratio 1.84
Current Dividend $2.31
Dividend Yield 2.91%
Number of Consecutive Years of Dividend Growth 5

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Total Current Assets $12,643,000,000
Total Current Liabilities $10,400,000,000
Long-Term Debt $7,330,000,000
Total Assets $50,361,000,000
Intangible Assets $4,171,000,000
Total Liabilities $27,519,000,000
Shares Outstanding (Diluted Average) 531,060,000

Earnings Per Share History

Next Fiscal Year Estimate $2.31
Dec2015 $7.73
Dec2014 $8.33
Dec2013 $6.02
Dec2012 $6.48

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.73
Dec2015 $6.87
Dec2014 $5.68
Dec2013 $3.73
Dec2012 $2.16

Recommended Reading:

Other ModernGraham posts about the company

10 Best Dividend Paying Stocks for the Enterprising Investor – August 2016
5 Undervalued Stocks Near Lows for Enterprising Value Investors – Aug 2016
10 Companies Benjamin Graham Would Invest In Today – June 2016
Phillips 66 Valuation – March 2016 $PSX
27 Companies in the Spotlight This Week – 12/20/14

Other ModernGraham posts about related companies

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Occidental Petroleum Corp Valuation – August 2016 $OXY
Valero Energy Corporation – August 2016 $VLO
Chevron Corp Valuation – August 2016 $CVX
Exxon Mobil Corporation Valuation – August 2016 $XOM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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