I have analyzed Phillips 66's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.
The analysis uses gauges to assess how well the company satisfies seven specific investment criteria. GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied. An Overall Score between zero and 100, which takes all gauges into account, is also computed. While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms. An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.
First, a quick review of the company itself.
Phillips 66 is an energy company with refining, midstream, downstream, and chemical operations. The company's roots go back to the merger between the independent Phillips Petroleum company and Conoco in 2002. Ten years later, ConocoPhillips decided it would focus on exploration and production, and it spun off the rest of its businesses as a separate company, which it named after the iconic "Phillips 66" brand. Phillips 66 operates refineries for converting crude oil (and, eventually, more eco-friendly oils) into gasoline and other fuels, which are sold at branded gas stations and other outlets. The company's chemicals business is a 50 percent share of Chevron Phillips Chemicals Company. Phillips 66 also has a significant interest in the pipelines and terminals that bring energy products to the company's refineries by owning 76 percent of Phillips 66 Partners (a master limited partnership). The environmental impact of one of the partnership's assets, its 25-percent stake in the Dakota Access pipeline, is being scrutinized carefully and could be shut down. Phillips 66 (the corporation) is now considering options for Phillips 66 Partners, which could include "a merger, reorganization, consolidation or other take-private transaction ... or other material changes to the Partnership’s business or capital or governance structure."
Phillips incurred a loss of $4 billion, $9.05 per share, on revenue of $64 billion during the last 12 months. In the quarter that ended on December 31, 2020, Phillips lost $1.23 per share on a GAAP basis, and it lost $1.15 per share after non-GAAP adjustments and exclusions. See Phillips's most recent quarterly report and my review of their results relative to expectations for additional information.
Shares of Phillips now trade for about $83 each, giving the company a market value of $36 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.
Analysis Results:
Phillips's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments.
1. The Company's Size is Substantial: GREEN
Market Value: $36.5 billion (large cap)
2. The Company is Conservatively Financed: RED
Current ratio = 1.4 (>2.0 is conservative)
Long-term debt/Working Capital = 397% (<150% is conservative)
3. The Company Generates Stable Earnings: RED
Sixteen positive quarterly earnings reports in last 5 years (worrisome)
Earnings variability = 123% (very high)
4. The Company Exhibits Earnings Growth: RED
Owner Earnings growth rate (trailing year) = N/A
Owner Earnings growth rate (five-year average) = N/A
Free Cash Flow growth rate (trailing year) = N/A
Free Cash Flow growth rate (five-year average) = N/A
5. The Company is Efficiently Profitable: RED
Cash Flow Return On Invested Capital = 6% (so-so)
Operating Profit/Sales = N/A (excellent)
6. The Company Pays a Healthy Dividend: YELLOW
Dividends paid for the last 7 years or longer
Dividend 5-year average growth rate = 11% (good)
Dividend = N/A of last year's FCF
7. The Company's Shares are Fairly Valued: RED
Price/Owner Earnings (last year) = N/A
Price/GAAP Earnings (five-year average) = 18.4 (moderate to pricey)
Free Cash Flow/Market Value = -2.2% (not acceptable, less than the five-year average of 2.9%)
Acquirer's Multiple = 999.0 (very expensive)
Price/Book Value = 1.7 (about the same as its five-year average)
Price/Sales = 0.6 (about the same as its five-year average)
In summary, the analysis assigned Phillips 66 one GREEN, one YELLOW, and five RED grades. The resulting Overall Score is 13 of the 100 possible points, which is low. The score is below the 60-point GCFR threshold, and, therefore, Phillips does not satisfy the GCFR criteria for investment consideration at this time.
The Overall Score would only increase to 21 points if the share price were to fall by 50 percent, from $83.05 to $41.38, all else being equal. It is also possible that Phillips's future results will push the score up (or pull it down). Revisit GCFR2 (https://gcfr2.com) occasionally for updates on Phillips's performance and the latest GCFR gauges and scores.
This analysis reported here is a limited evaluation of the subject company. It does not consider all material facts about the company's operations, finances, or future prospects. The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent. Readers are strongly encouraged to verify all data and perform their own independent analyses. Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk. This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.
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#phillips #psx #gauges #gcfr #gcfr2 #valueinvesting #nac_financialanalysis
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