Phillips 66 (NYSE:PSX) went public as a spinout of ConocoPhillips essentially a year ago, and has risen 74% since shortly after becoming independently publicly traded. The $36 billion market cap oil and gas refining and marketing company received considerable attention from Warren Buffett, whose holding company Berkshire Hathaway had over 27 million shares in its portfolio at the end of June and made no changes to that position at least through December (find Buffett’s favorite stocks). However, since the beginning of April Phillips 66 has fallen 15%.
At Phillips 66’s current valuation, the company only needs to maintain its current level of earnings in order to be undervalued. Of course, we have seen that the last quarterly report showed a significant decrease in net income and so we’d be a bit concerned that that result might be a better predictor of this year than 2012 as a whole. Wall Street analysts expect moderate growth over the next several years, and as a result the five-year PEG ratio is 0.8. We track 13F filings from hedge funds and other notable investors such as Berkshire Hathaway in our database, which we use to research investing strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average) and track positions over time. In addition to Berkshire, one large hedge fund owning Phillips 66 (NYSE:PSX) was D.E. Shaw, managed by billionaire David Shaw, which disclosed ownership of 1.4 million shares (see D.E. Shaw’s stock picks).
Other downstream-focused energy companies include Marathon Petroleum Corp (NYSE:MPC) (not to be confused with Marathon Oil), Valero Energy Corporation (NYSE:VLO), Tesoro Corporation (NYSE:TSO), and HollyFrontier Corp (NYSE:HFC). These four peers are all cheaply priced as well, with forward earnings multiples in the 7-9 range. In the case of Valero and Tesoro, the trailing P/Es are slightly higher- though still in value territory- and so the sell-side appears to be expecting earnings growth at those two companies. Valero Energy Corporation (NYSE:VLO) did experience significant growth in both revenue and pretax income in 2012 versus a year earlier (as with Phillips 66, earnings were lower on a higher effective tax rate) while Tesoro Corporation (NYSE:TSO)’s revenue was up in its last quarterly report compared to the fourth quarter of 2011.
Marathon Petroleum Corp (NYSE:MPC) and HollyFrontier Corp (NYSE:HFC) are in a more similar situation to Phillips 66 (NYSE:PSX): they are quite cheap even if we look at their historical results, and in fact Marathon boasts a slightly lower five-year PEG ration than that company does at 0.7. That company also reported higher sales in the fourth quarter of 2012 versus a year earlier, and combined with its cheap pricing it might well be a better value prospect. HollyFrontier delivered high earnings growth in its most recent quarter compared to the same period in the previous year, but that appears to have been a temporary bump as revenue growth was lower and analyst expectations are calling for something of a drop in earnings in coming quarters.
We like Phillips 66 (NYSE:PSX) at these levels, though we would want to check out its last quarter in more detail to try to determine what caused the decrease in net income. In addition, the rest of the industry also seems rich in value opportunities, and with some companies not having issues in recent quarters those peers might be better places for a value investor to start looking.
Disclosure: I own no shares of any stocks mentioned in this article.
