Oil & Gas Stocks

Phillips 66 Valuation – March 2019 #PSX

Company Profile (excerpt from Reuters): Phillips 66, incorporated on November 10, 2011, is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. The Company operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment gathers, processes, transports and markets natural gas, and transports, stores, fractionates and markets natural gas liquids (NGLs) in the United States. The Chemicals segment consists of its equity investment in Chevron Phillips Chemical Company LLC (CPChem), which manufactures and markets petrochemicals and plastics. The Refining segment buys, sells and refines crude oil and other feedstocks at refineries, primarily in the United States and Europe. The M&S segment purchases for resale and markets refined petroleum products, such as gasolines, distillates and aviation fuels, primarily in the United States and Europe, as well as includes the manufacturing and marketing of specialty products, and power generation operations.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of PSX – March 2019

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 $44,040,480,834 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.48 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 343.98% Pass
6. Moderate PEmg Ratio PEmg < 20 11.54 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.66 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 1.48 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.60 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

EPSmg $8.39
MG Growth Estimate 3.34%
MG Value $127.43
Opinion Fairly Valued
MG Grade C-
MG Value based on 3% Growth $121.72
MG Value based on 0% Growth $71.35
Market Implied Growth Rate 1.52%
Current Price $96.89
% of Intrinsic Value 76.04%

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 Fairly Valued after growing its EPSmg (normalized earnings) from $6.87 in 2015 to an estimated $8.39 for 2019. This level of demonstrated earnings growth supports the market’s implied estimate of 1.52% 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 within a margin of safety relative to the price.

At the time of valuation, further research into Phillips 66 revealed the company was trading above its Graham Number of $93.06. The company pays a dividend of $3.1 per share, for a yield of 3.2%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 11.54, which was below the industry average of 58.42, 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 $-30.01.

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

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$30.01
Graham Number $93.06
PEmg 11.54
Current Ratio 1.48
PB Ratio 1.66
Current Dividend $3.10
Dividend Yield 3.20%
Number of Consecutive Years of Dividend Growth 7

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $13,209,000,000
Total Current Liabilities $8,935,000,000
Long-Term Debt $11,093,000,000
Total Assets $54,302,000,000
Intangible Assets $4,139,000,000
Total Liabilities $27,149,000,000
Shares Outstanding (Diluted Average) 464,528,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $7.12
Dec2018 $11.80
Dec2017 $9.85
Dec2016 $2.92
Dec2015 $7.73
Dec2014 $8.33
Dec2013 $6.02
Dec2012 $6.48

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $8.39
Dec2018 $8.73
Dec2017 $7.12
Dec2016 $5.94
Dec2015 $6.87
Dec2014 $5.68
Dec2013 $3.73
Dec2012 $2.16

Recommended Reading:

Other ModernGraham posts about the company

Phillips 66 Valuation – April 2018 $PSX
Phillips 66 Valuation – August 2016 $PSX
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

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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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