As PSX Surges, the Value Story Persists.

Phillips 66 (PSX) stock climbed 1.5 % this afternoon. According to our metrics, the company seems undervalued at today's prices. In the below analysis, we will put Phillips 66's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.

Phillips 66 operates as an energy manufacturing and logistics company in the United States, the United Kingdom, Germany, and internationally. The large-cap Energy company is based in Houston, United States and has 13,000 full time employees.

PSX's P/E Ratio Is Better Than the Sector Average

Compared to the Energy sector's average of 7.54, Phillips 66 has a trailing twelve month price to earnings (P/E) ratio of 3.5 and an expected P/E ratio of 7.9. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $26.18 and $11.74 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Phillips 66's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Phillips 66 Has a Negative Rate of Expected Growth

P/E ratios are falling out of favor as a means of valuing stocks for a number of reasons. Earnings are subject to manipulation, and the P/E ratio is static in time, in the sense that it doesn't take into account expected long term growth of the company. Although estimated long terms growth rates are just as easily manipulable as earnings, dividing Phillips 66's P/E ratio by its expected growth rate can tell us the relative market valuation of the company in relation to expected earnings growth.

The resulting metric, called price to earnings growth (PEG) is -0.47 for Phillips 66. Since the PEG ratio is negative and the company's reported earnings per share are positive, we can deduce that the company's expected growth rate is negative. Needless to say, this is a red flag for investors with a long term horizon.

PSX Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Phillips 66, the P/B value is 1.4 while the average for the Energy sector is 1.68.

PSX Is Generating Cash

Phillips 66 has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 22.5%, compared to -13.2% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 74.2% and a coefficient of variability of 128.4%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2022-12-31 10,813,000 -2,194,000 8,619,000 107.34
2021-12-31 6,017,000 -1,860,000 4,157,000 613.84
2020-12-31 2,111,000 -2,920,000 -809,000 -186.52
2019-12-31 4,808,000 -3,873,000 935,000 n/a

Phillips 66 Is Not a Profitable Business

If you are looking to make PSX a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Phillips 66's management may be able to make the business profitable in the future.

Phillips 66's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2022-12-31 169,990,000 151,561,000 10.84 55.52
2021-12-31 111,476,000 103,707,000 6.97 -11.1
2020-12-31 64,129,000 59,102,000 7.84 -19.26
2019-12-31 107,293,000 96,870,000 9.71 n/a

Phillips 66's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2022-12-31 169,990,000 8,809,000 5.66 1247.62
2021-12-31 111,476,000 7,301,000 0.42 117.43
2020-12-31 64,129,000 6,571,000 -2.41 -179.28
2019-12-31 107,293,000 7,164,000 3.04 n/a

Phillips 66's cost of revenue is growing at a rate of 11.8% in contrast to 5.3% for operating expenses. Sales revenues, on the other hand, have experienced a 12.2% growth rate. As a result, the average gross margins growth is 2.8 and the average operating margins growth rate is 16.8, with coefficients of variability of 19.9% and 206.5% respectively.

We See Mixed Market Signals Regarding PSX

Phillips 66 has an average rating of buy and target prices ranging from $139.0 to $101.0. At its current price of $92.18, the company is trading -23.55% away from its target price of $120.57. 2.3% of the company's shares are linked to short positions, and 74.8% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-03-31 Vanguard Group, Inc. (The) 9% 42,300,523 $3,899,262,223
2023-03-31 Blackrock Inc. 8% 37,428,804 $3,450,187,164
2023-03-31 State Street Corporation 7% 32,353,890 $2,982,381,590
2023-03-31 Wells Fargo & Company 4% 17,023,956 $1,569,268,269
2023-03-31 Geode Capital Management, LLC 2% 9,711,084 $895,167,726
2023-03-31 Wellington Management Group, LLP 2% 8,623,978 $794,958,294
2023-03-31 FMR, LLC 2% 8,066,680 $743,586,564
2023-03-31 Aristotle Capital Management, LLC 2% 7,922,878 $730,330,896
2023-03-31 Bank of America Corporation 1% 6,859,397 $632,299,217
2023-03-31 Morgan Stanley 1% 6,803,519 $627,148,383
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.