We've been asking ourselves recently if the market has placed a fair valuation on Phillips 66. Let's dive into some of the fundamental values of this large-cap Energy company to determine if there might be an opportunity here for value-minded investors.
A Very Low P/E Ratio but Trades Above Its Graham Number:
Phillips 66 operates as an energy manufacturing and logistics company in the United States, the United Kingdom, Germany, and internationally. The company belongs to the Energy sector, which has an average price to earnings (P/E) ratio of 7.54 and an average price to book (P/B) ratio of 1.68. In contrast, Phillips 66 has a trailing 12 month P/E ratio of 4.9 and a P/B ratio of 1.62.
When we divide Phillips 66's P/E ratio by its expected EPS growth rate of the next five years, we obtain its PEG ratio of -0.85. Since it's negative, the company has negative growth expectations, and most investors will probably avoid the stock unless it has an exceptionally low P/E and P/B ratio.
Exceptional EPS Growth Obtained Primarily Through Share Buybacks:
| 2017-02-17 | 2018-02-23 | 2019-02-22 | 2020-02-21 | 2021-02-24 | 2022-02-18 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $85,703 | $104,101 | $114,156 | $107,293 | $64,129 | $111,476 |
| Gross Margins | 27.0% | 24.0% | 14.0% | 11.0% | 10.0% | 8.0% |
| Operating Margins | 3% | 3% | 7% | 3% | -2% | 0% |
| Net Margins | 2.0% | 5.0% | 5.0% | 3.0% | -6.0% | 1.0% |
| Net Income (MM) | $1,555 | $5,106 | $5,595 | $3,076 | -$3,975 | $1,317 |
| Net Interest Expense (MM) | -$338 | -$438 | -$504 | -$458 | -$499 | -$581 |
| Depreciation & Amort. (MM) | -$1,168 | -$1,318 | -$1,356 | -$1,341 | -$1,395 | -$1,605 |
| Earnings Per Share | $2.93 | $9.85 | $11.8 | $6.78 | -$9.04 | $2.98 |
| EPS Growth | n/a | 236.18% | 19.8% | -42.54% | -233.33% | 132.96% |
| Diluted Shares (MM) | 530 | 519 | 474 | 454 | 440 | 442 |
| Free Cash Flow (MM) | $6,083 | $5,404 | $10,200 | $8,595 | $4,980 | $7,850 |
| Capital Expenditures (MM) | -$3,120 | -$1,756 | -$2,627 | -$3,787 | -$2,869 | -$1,833 |
| Net Current Assets (MM) | -$15,248 | -$12,553 | -$13,940 | -$17,156 | -$19,922 | -$19,260 |
| Long Term Debt (MM) | $9,588 | $10,069 | $11,093 | $11,216 | $14,906 | $12,959 |
| Net Debt / EBITDA | 2.06 | 1.45 | 0.88 | 2.22 | -78.24 | 5.52 |
Phillips 66 has slimmer gross margins than its peers, weak operating margins with a negative growth trend, and exceptional EPS growth obtained primarily through share buybacks. Phillips 66 has weak revenue growth and a flat capital expenditure trend, irregular cash flows, and just enough current assets to cover current liabilities. In addition, we note significant leverage.
