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Should You Buy or Sell the Phillips 66 (PSX) Correction?

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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%.

Phillips 66 (PSX)Total revenue for the company decreased by 9% last year compared to 2011 (though comparisons may be somewhat complicated by the spinout). However, costs were also lower and Phillips 66 (NYSE:PSX) experienced essentially flat pretax income even with the business taking slightly higher impairment charges than in the previous year; net income was down on a higher effective tax rate. Earnings per share for the year came out to $6.48, which places the current stock price at only 9 times trailing earnings. We would note that the earnings numbers for the fourth quarter of 2012 were considerably poorer than for earlier in the year, though revenue was in line with the general trend.

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.

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