Occidental Petroleum is currently trading at $62.55 per share and has a Graham number of $75.23, which implies that it is -16.9% below its fair value. We calculate the Graham number as follows:
√(22.5 * earnings per share * book value per share) = √(22.5 * 12.05 * 20.877) = 75.23
The Graham number is one of seven factors that Graham enumerates in Chapter 14 of The Intelligent Investor for determining whether a stock offers a margin of safety. Rather than use the Graham number by itself, its best to consider it alongside the following:
Sales Revenue Should Be No Less Than $100 million.
For Occidental Petroleum, average sales revenue over the last few years has been $20,495,500,000.00, so according to the analysis the stock has impressive sales revenue.
Current Assets Should Be at Least Twice Current Liabilities.
We calculate Occidental Petroleum's current ratio by dividing its total current assets of $10,211,000,000 by its total current liabilities of $8,324,000,000. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Occidental Petroleum’s current assets outweigh its current liabilities by a factor of 1.2 only.
The Company’s Long-term Debt Should Not Exceed its Net Current Assets
This means that its ratio of debt to net current assets should be 1 or less. Since Occidental Petroleum’s debt ratio is 15.3, the company has too much debt. We calculate Occidental Petroleum’s debt to net current assets ratio by dividing its total long term of debt of $28,927,000,000 by its current assets minus total current liabilities.
The Stock Should Have a Positive Level of Retained Earnings Over Several Years.
In Occidental Petroleum’s case, retained earnings have averaged $12,851,500,000 over the last 4 years. Retained earnings refer to the net income left for equity investors after all expenses have been accounted for, including dividends. It's a similar metric to free cash flow, with the difference being that earnings are calculated on an accrual, as opposed to a cash basis.
There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years.
Occidental Petroleum has offered a dividend since 1987, with a yield of 5.4% over the last five years.
The Company Should Have a Minimum Increase of at Least One-third in Eps Over the Past 10 Years.
We are going to compare Occidental Petroleum's earnings per share averages from the two 'bookends' of the 15 year period for which we have data. The first bookend comprises the years 2007, 2008, and 2009, whose EPS values of $6.42, $8.34, and $3.58 average out to $6.11. Next we look at the years 2019, 2020, and 2021, whose values of $-1.22, $-17.06, and $1.58 average out to $-5.57. The growth rate between the two averages does not meet Graham's standard since it is -191.16%.
Based on the above analysis, we can conclude that Occidental Petroleum satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it is trading below its fair value and has:
- impressive sales revenue
- an average current ratio
- too much debt
- good record of retained earnings
- a solid record of dividends
- decreasing earnings per share
