The best investors are not afraid to go against the grain. And an investment in Occidental Petroleum, which has an average analyst rating of only hold, would certainly fit the bill. Might patient investors be able to find value in this stock? Let's dive into numbers and see for ourselves.
Let's start our value analysis with the price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's tangible assets minus its liabilities -- you can also think of it as the company's equity value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Occidental Petroleum is 1.78, compared to its sector average of 1.86 and the S&P500's average P/B of 4.74.
The most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 50.12 divided by either its trailing or forward earnings, which for Occidental Petroleum are $3.86 and $3.16 respectively. Based on these values, the company's trailing P/E ratio is 13.0 and its forward P/E ratio is 15.9. By way of comparison, the average P/E ratio of the Energy sector is 13.62 and the average P/E ratio of the S&P 500 is 29.3.
Indebted or mismanaged companies can't sustain shareholder value for long, even if they have strong earnings. For this reason, considering Occidental Petroleum's ability to meet its debt obligations is an important aspect of its valuation. By adding up its current assets, then subtracting its inventory and prepaid expenses, and then dividing the whole by its current liabilities, we obtain the company's Quick Ratio of 0.596. Since OXY's is lower than 1, it does not have the liquidity necessary to meet its current liabilities.
One last metric to check out is Occidental Petroleum's free cash flow of $6.04 Billion. This represents the total sum of all the company's inflows and outflows of capital, including the costs of servicing its debt. It's the final bottom line of the company, which it can use to re-invest or to pay its investors a dividend. With such healthy cash flows, investors can expect Occidental Petroleum to keep paying its 1.6% dividend.
Shares of Occidental Petroleum appear to be fairly valued or undervalued at today's prices -- despite the negative outlook from analysts. Sometimes stocks are cheap for a reason, so remember that just because a stock is fairly valued does not necessarily mean it will go up. So be sure to do your own due diligence if you are interested in taking a long position in OXY.
