Is Phillips 66 Turning Back Time?

With shares of Phillips 66 (NYSE:PSX) trading at around $62.13, is PSX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Phillips 66 operates in three segments: Refining & Marketing, Midstream, and Chemicals. It has been a big winner since its spinoff from ConocoPhillips (NYSE:COP). It’s also a stock that is liked by analysts: 10 Buy, 7 Hold, 0 Sell. In addition to that, it has returned $1.2 billion of capital to shareholders since its inception. In case that’s not enough positive news, here are some more important points:

  • Plans to develop natural gas liquids fractionator in Old Ocean, Texas, that will process 100,000 barrels of NGL per day
  • Strong Refining and Chemical margins
  • Increased access to advantage domestic crudes through third-party logistic agreements
  • Strong cash flow
  • Solid safety and environmental performance
  • Doubled refining profits
  • Recently beat expectations
  • Good stock valuation
  • 2.00 percent yield

The company culture is also superb. Based on ratings at Glassdoor.com, employees have rated their employer a 4.1 of 5, which is extraordinarily high. A whopping 92 percent would recommend the company to a friend. This indicates a strong company culture, which doesn’t just mean more production; it also means employees are likely to believe the company has a bright future. They’re happy and excited. This is a good sign.

The chart below compares fundamentals for Phillips 66, Marathon Petroleum Corporation (MPC), and Valero Energy Corporation

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(NYSE:VLO).

PSX MPC VLO
Trailing P/E 8.07 7.55 6.72
Forward P/E 8.49 7.66 6.64
Profit Margin 3.03% 4.42% 2.32%
ROE N/A N/A N/A
Operating Cash Flow 6.87B N/A N/A
Dividend Yield 2.00% 1.80% 2.10%
Short Position 1.00% 2.00% 3.30%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Have Weakened

Phillips 66 has performed exceptionally well over the past year, but that momentum has slowed as of late, which has been the case for the industry as well.

1 Month Year-To-Date 1 Year 3 Year
PSX -3.91% 17.58% 94.28% 0.00%
MPC -7.46% 25.08% 110.5% 0.00%
VLO -2.38% 22.63% 90.05% 137.4%
50-Day SMA 62.84
200-Day SMA 57.36

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Phillips 66 is close to the industry average of 0.30. Debt isn’t a concern.

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Debt-To-Equity Cash Long-Term Debt
PSX 0.34 3.47B 6.97B
MPC 0.28 4.86B 3.36B
VLO 0.39 1.72B 7.05B

E = Earnings Are Steady

Remember, the company was spun off approximately one year ago. Therefore, the quarterly results are more important at this point in time. On a sequential basis, revenue has been steady without being impressive. Earnings have been a bit jumpy, but profits are consistent.

Fiscal Year 2009 2010 2011 2012
Revenue ($) in billions 113.95 148.66 200.61 182.92
Diluted EPS ($) 1.16 7.52 6.48
Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in billions 46.52 47.83 43.91 44.67 42.33
Diluted EPS ($) 1.00 1.86 2.51 1.111 2.23

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

An increase in domestic oil supply is good for refiner margins. Refiners have been performing well by processing cheap U.S. oil and selling it for more internationally. We’re also currently in the midst of a natural gas boom.

The biggest concern is the global economy. If the economy falters, then refiners will suffer. Then again, a lot more is dependent on central bank action than the actual economy. For instance, if Bernake backs off, then it will be time to rush for the exits.

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Conclusion

Phillips 66 was given a WAIT AND SEE rating the last time it was covered in this column. That ended up being a good call, but it was also lucky. After looking deeper, it looks as though the company’s potential was underestimated. At the same time, there are definitely risks due to an unpredictable global economy and the stock market being manipulated by central banks.

As long as the broader market is propped up by those with the power to do so, Phillips 66 is an OUTPERFORM. Even if the stock’s performance is ho-hum, there will be respectable dividend payments. However, keep an eye out for the unwinding of monetary stimulus. Once this happens, refiners will not be a safe haven.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions.

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