Standing out among the Street's worst performers today is Marathon Petroleum, a oil & gas integrated company whose shares slumped -3.0% to a price of $158.61, 17.42% below its average analyst target price of $192.07.
The average analyst rating for the stock is buy. MPC lagged the S&P 500 index by -4.0% so far today and by -21.7% over the last year, returning 1.5%.
Marathon Petroleum Corporation, together with its subsidiaries, operates as an integrated downstream energy company primarily in the United States. The company is classified within the energy sector. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -— meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.
Marathon Petroleum's trailing 12 month P/E ratio is 8.3, based on its trailing EPS of $19.06. The company has a forward P/E ratio of 10.8 according to its forward EPS of $14.65 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2024, the energy sector has an average P/E ratio of 13.84, and the average for the S&P 500 is 28.21.
One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Marathon Petroleum market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.
Dividing Marathon Petroleum's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -3.69. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Marathon Petroleum was $12.23 Billion as of its last annual report. Over the last 4 years, the company's average free cash flow has been $6.05 Billion and they've been growing at an average rate of 26.3%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in MPC have received an annualized dividend yield of 2.0% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Marathon petroleum's P/B ratio is 2.54 -- in other words, the market value of the company exceeds its book value by a factor of more than 2, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 2.05 as of the second quarter of 2024.
Since it has a Very low P/E ratio, an average P/B ratio, and generally positive cash flows with an upwards trend, Marathon Petroleum is likely undervalued at today's prices. The company has mixed growth prospects because of a PEG ratio of less than 1 and weak operating margins with a positive growth rate. We hope you enjoyed this overview of MPC's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
