Shares of Marathon Petroleum (MPC) jumped 0.8 % during today's morning session, bringing their 52 week performance to 45.0%. The stock seems to be fairly valued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.
Marathon Petroleum Corporation, together with its subsidiaries, operates as an integrated downstream energy company primarily in the United States. The large-cap Energy company is based in Findlay, United States and has 17,800 full time employees.
MPC's P/E Ratio Is Better Than the Sector Average
Compared to the Energy sector's average of 7.54, Marathon Petroleum has a trailing twelve month price to earnings (P/E) ratio of 5.5 and an expected P/E ratio of 9.5. 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 $27.27 and $15.74 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 Marathon Petroleum's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.
Marathon Petroleum 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 Marathon Petroleum'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 -0.36 for Marathon Petroleum. 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.
MPC 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 Marathon Petroleum, the P/B value is 2.34 while the average for the Energy sector is 1.68.
MPC's Weak Cash Flow Generation Is Troubling
The table below shows that Marathon Petroleum is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Marathon Petroleum's case, free cash flow is growing at an average rate of 0.0% with a coefficient of variability of 13659145509.1%. We can also see that cash flows from operations are evolving at a 0.0% rate, versus 0.0%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 16,361,000 | -2,330,000 | 18,691,000 | 229.59 |
| 2022-02-24 | 4,360,000 | -1,311,000 | 5,671,000 | 12.16 |
| 2021-02-26 | 2,419,000 | -2,637,000 | 5,056,000 | -64.4 |
| 2020-02-28 | 9,441,000 | -4,763,000 | 14,204,000 | 52.13 |
| 2019-02-28 | 6,158,000 | -3,179,000 | 9,337,000 | -0.07 |
| 2018-02-28 | 6,612,000 | -2,732,000 | 9,344,000 |
Marathon Petroleum Is Not a Profitable Business
If you are looking to make MPC 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 Marathon Petroleum's management may be able to make the business profitable in the future.
Marathon Petroleum's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 178,236,000 | -151,671,000 | 15 | 66.67 |
| 2022-02-24 | 120,451,000 | -110,008,000 | 9 | 50.0 |
| 2021-02-26 | 69,897,000 | -65,733,000 | 6 | -45.45 |
| 2020-02-28 | 111,148,000 | -99,228,000 | 11 | 10.0 |
| 2019-02-28 | 86,086,000 | -77,047,000 | 10 | 0.0 |
| 2018-02-28 | 74,104,000 | -66,519,000 | 10 |
Marathon Petroleum's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023-02-23 | 178,236,000 | -6,812,000 | 11 | 266.67 |
| 2022-02-24 | 120,451,000 | -6,622,000 | 3 | 175.0 |
| 2021-02-26 | 69,897,000 | -6,753,000 | -4 | -200.0 |
| 2020-02-28 | 111,148,000 | -6,978,000 | 4 | -20.0 |
| 2019-02-28 | 86,086,000 | -4,852,000 | 5 | 0.0 |
| 2018-02-28 | 74,104,000 | -4,832,000 | 5 |
Marathon Petroleum's cost of revenue is growing at a rate of -0.0% in contrast to 5.3% for operating expenses. Sales revenues, on the other hand, have experienced a 0.0% growth rate. As a result, the average gross margins growth is -0.1 and the average operating margins growth rate is 14.2, with coefficients of variability of 28.8% and 120.4% respectively.
We See Mixed Market Signals Regarding MPC
Marathon Petroleum has an average rating of buy and target prices ranging from $179.0 to $141.0. At its current price of $148.82, the company is trading -6.53% away from its target price of $159.21. 2.7% of the company's shares are linked to short positions, and 78.5% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-06-30 | Vanguard Group Inc | 10% | 40,417,604 | $6,014,948,123 |
| 2023-06-30 | Blackrock Inc. | 8% | 33,751,993 | $5,022,971,845 |
| 2023-06-30 | State Street Corporation | 7% | 28,222,635 | $4,200,092,747 |
| 2023-06-30 | Elliott Investment Management L.p. | 3% | 11,065,000 | $1,646,693,381 |
| 2023-06-30 | Geode Capital Management, LLC | 2% | 7,845,026 | $1,167,496,826 |
| 2023-06-30 | Morgan Stanley | 2% | 7,449,292 | $1,108,603,690 |
| 2023-06-30 | Bank Of New York Mellon Corporation | 2% | 6,819,402 | $1,014,863,455 |
| 2023-06-30 | Ameriprise Financial, Inc. | 1% | 5,726,575 | $852,228,933 |
| 2023-06-30 | Dimensional Fund Advisors LP | 1% | 5,237,689 | $779,472,915 |
| 2023-06-30 | Boston Partners | 1% | 5,182,824 | $771,307,905 |
