Can ConocoPhillips Reach its Pre-Recession Highs?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As one of the largest upstream oil companies in the United States, ConocoPhillips (NYSE: COP) has been a good investment since the recession, returning nearly 50 percent. In this time period, the company has spun off its downstream business into Phillips 66 (NYSE: PSX), and unlike most breakups, this one was for the best. Much like a newly unrestricted spouse that is free of their significant other after a divorce, COP does not have to handle the complexities of tasks that slow it down – oil refining and distribution operations in this case. Instead, it can concentrate on what it does best: exploration and production. It seems as though Conoco was preparing for this split, as it acquired E&A giants like Phillips Petroleum Company and Burlington Resources in the early 2000s. Despite its long-term success, shares of COP are currently caught in an economic malaise – mostly due to lower than expected oil prices and ongoing Eurozone fears. While this negative sentiment is warranted from a macroeconomic standpoint, the analytics suggest that now might be the best time to buy into ConocoPhillips.
Since 2009, COP has seen its revenue grow by 64.4 percent, which is easily higher than competitors like Occidental Petroleum Corp (NYSE: OXY) at 55.3 percent, Marathon Oil Corp (NYSE: MRO) at -71.8 percent, Anadarko Petroleum Corp at 55.2 percent, and Chevron Corp (NYSE: CVX) at 47.8 percent. Moreover, ConocoPhillips has translated this exceptional top line growth to its earnings, as EPS has nearly tripled in this same time period, from $3.24 in 2009 to $8.97 in 2011. In the first quarter of this year, however, the company reported an EPS of $2.02 per share, which was slightly off of Wall Street’s estimates and its own Q1 results one year earlier.
Nonetheless, shares of COP look to be undervalued at the moment. Using the Price-Earnings ratio, which is a measure of how investors value each dollar of a company’s earnings, is a good place to start. Currently, COP is trading at a P/E ratio of 5.7 times earnings, which is below the industry average (7.7X) and competitors like OXY (9.7X), MRO (10.8X), and CVX (7.3X). Additionally, the stock is undervalued in comparison to its 10-year historical average P/E of 10.4X. In fact, over the past decade, COP’s earnings have historically traded at a 38.5 percent discount to those of the S&P 500 average. This year, shares of the stock are cheaper, trading at a much greater discount of 62.7 percent. Using the industry average P/E in conjunction with a modest year-ahead EPS forecast of $7.38, we can set a target price of $56.82 by next May – this would be a near 10 percent appreciation from today’s price, not a shabby return at all.
Giving support to this conclusion, ConocoPhillips also sports a Price-Earnings-Growth ratio – PEG for short – of 0.9. Typically, anything below 1.0 signals an undervaluation. It’s also worth mentioning that this oil company has cultivated its cash hoard rather nicely over the past year, expanding its operating cash flow by 15.3 percent. Despite this growth, COP’s Price-Cash Flow ratio (5.1X) is below the industry average of 5.2X and its own 10-year historical average of 11.6X.
If this undervaluation is corrected, investors can look for shares of COP to rise over the coming year. It remains to be seen, though, if the company’s shares can reach their pre-recession highs between $65 and $70. Unlike this period of time, commodity prices are currently in a lull, with oil and natural gas leading the proverbial pack. While the latter is currently sitting near a 10-year low, oil prices are not as depressed, and currently rest just over $90 a barrel. Interestingly, Conoco bulls can take this as a positive sign, as the majority of the company’s proven reserves are crude-based. Competitors that have a larger focus on natural gas – such as Anadarko Petroleum and Chesapeake Energy Corp – may have a harder time moving forward.
Currently, Warren Buffett holds $2.1 million worth of COP in his portfolio, and it’s never a bad play to follow him. In addition, WealthLift’s Sentiment Index rates COP as a strong buy, with an overall positive sentiment from 81.82 percent of investors. Whether it’s this oil giant’s superb top and bottom line growth, or its persistent undervaluation, ConocoPhillips is looking investors straight in the face and screaming ‘Buy Me’; don’t get caught up in the surrounding macroeconomic circumstances. Fairly valued shares of COP will have investors feeling cheery by next summer.
Fool blogger Jake Mann does not own shares in any of the companies mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.