We all know it’s always best to buy when stocks are inexpensive, but we must also observe the opposite and sell when stocks appear over-priced. Recently Occidental Petroleum Corporation(NYSE:OXY) has seen quite a run, moving about 25% in the last six months.
Chart Courtesy of The Motley Fool
However, upon looking at the fundamentals I am a bit skeptical. Comparing metrics to industry leaders Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM), Occidental Petroleum Corporation (NYSE:OXY) looks to be overvalued in a number of ways.
| Valuation | Occidental | ExxonMobil | Chevron | Industry Average |
| P/E | 17.20 | 9.10 | 9.20 | 9.0 |
| Price/Sales | 3.16 | 0.85 | 1.03 | 0.61 |
| Price/Book | 1.84 | 2.39 | 1.68 | 1.46 |
| Yield | 2.70% | 2.80% | 3.30% | 5.20% |
| Return on Assets | 6.70% | 16.90% | 11.00% | 8.60% |
| Return on Investment | 9.20% | 32.90% | 17.10% | 15.10% |
Information from The Motley Fool
The P/E is almost twice that of Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX). But there is absolutely no reason this stock deserves to trade at a premium. Occidental Petroleum Corporation (NYSE:OXY) has a RoA and RoI that is underperforming both Exxon and Chevron. Its price/sales of 3.16 is five times higher than the industry average of 0.61. The price/book of 1.84 isn’t much better at over 20% above the industry average of 1.46.
Finally, the yield is a less than impressive 2.70%, which, when the 5 year inflation average of 1.98% is taken into account, produces very little real return. With a 42% payout ratio, compared to an industry average 32%, there appears to be very little room for future dividend increases. With a big payout ratio and a low rate of return on equity the growth of this position should be called into question.
Results for the most recent quarter were disappointing for Occidental Petroleum Corporation (NYSE:OXY) with revenue decreasing from $6.27 billion in Q1 of 2012 to $5.87 billion in Q1 of 2013. Earnings also suffered declining from $1.92 to $1.68 over that same period. This could be attributed to the lower price for worldwide crude oil/per barrel received, decreasing from $107.98 to $98.07. With oil currently holding around the low to mid $90 range, and EIA Crude Oil Projections showing $93.17 for 2013 and 92.25 for 2014, look for revenue to continue decreasing.
The only two highlights that I could find in the recent quarterly reports were that operating costs had dropped 19% relative to 2012 and that midstream operations seemed to be gaining momentum. But these figures alone do not remotely begin to justify the current valuations for this stock.
A plan of action
Occidental Petroleum Corporation (NYSE:OXY) seems ripe for a sell at these lofty levels. But should you replace this position with another oil stock? Absolutely. In fact, it was no fluke that I compared Occidental to Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) which are among my top picks in the industry.
The RoA and RoI of ExxonMobil trump almost every player in the industry. While Exxon’s 2.80% yield is not that attractive in my opinion, it comes only at the expense of a 23% payout ratio which leaves lots of room for future increases. In fact, Exxon sports a five-year dividend growth rate of 8.33%. Finally, with Exxon being the top natural gas producer in the USA it is poised to capitalize on this burgeoning commodity which the EIA Natural Gas Projections show will only become more expensive.
Chevron has been a favorite of mine for many years now. The reason is simple: quality management. It’s quality management that lead Chevron to deliver the goods more often than any other major player in the industry. This is evident by the five year net profit margin of 9.50%. Compare that to the 4.50% of Exxon and the industry average of 6.30. The five year EPS growth rate is also impressive at 9.27% vs an industry average of -2.96%. Expect this to continue.
Conclusion
Based on valuations and future crude oil price projections, Occidental Petroleum Corporation (NYSE:OXY) looks too expensive. ExxonMobil and Chevron present respectable re-allocations for those investing in the oil industry. Profit-taking and playing it safe is often prudent during times of market uncertainty and high valuations. I recommend that those with a position in Occidental do a bit of profit taking, especially after such a handsome and underserved run to the upside. If you must stay in the oil sector, go with the best of breed.
The article Is This Stock a Foolish Investment at These Prices? originally appeared on Fool.com and is written by James Catlin.
James Catlin has no position in any stocks mentioned. The Motley Fool recommends Chevron. James is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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