Downstream energy enterprise Phillips 66 (PSX) might not be the immediate choice for investors seeking a hydrocarbon play. Nevertheless, geopolitical flareups could lead to significant upside for the entity, overcoming concerns related to a relatively rich valuation premium and a tough fundamental backdrop for oil refining and marketing specialists. Therefore, I am bullish on PSX stock.
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The Numbers Don’t Tell the Whole Story Behind PSX Stock
Before diving into the compelling fundamental narrative of PSX stock, it’s helpful to consider the financial framework. It’s here where many on Wall Street have questions about the underlying company’s forward viability.
Right now, the market prices PSX stock at a trailing-year earnings multiple of 10.66x. At first glance, that doesn’t sound bad at all. Presently, the underlying Oil and Gas Refining and Marketing sector runs an average earnings multiple of 12.7x. So, if anything, Phillips 66 is a discounted opportunity.
Further, on the top line, PSX stock exchanges hands at 0.41x trailing-year revenue. That runs a bit higher than the average of 0.37x seen during the period between the first quarter of 2023 and Q1 2024. Still, the industry itself prints an average sales multiple of 0.54x. Again, Phillips 66 appears undervalued. So, why are investors concerned about the underlying entity?
It comes down to forward projections. By the end of Fiscal 2024, analysts believe that earnings per share may slip to $10.53. If so, that would imply a severe erosion of 33.4% from last year’s print of $15.81. On the other end of the income statement, experts are forecasting sales to decline to $142.3 billion. That would be a nearly 4% dip from 2023’s haul of $161.39 billion.
Assuming a share count of 423.95 million, the projected earnings multiple for PSX stock would come out to 13.17x. It’s not a perfect apples-to-apples comparison, but it runs hotter than the current sector average.
To be fair, the revenue multiple wouldn’t change that much from the small projected dip in 2024. However, analysts are also forecasting a decline in Fiscal 2025 to $139.29 billion. That would be down another 3.4% (from projected 2024 sales), incrementally raising the forward revenue multiple to over 0.42x.
Technically, that still wouldn’t be considered overvalued. However, investors generally don’t like to put money into eroding businesses. That’s what makes PSX stock relatively overvalued. And sure enough, shares have only gained a little over 6% on a year-to-date basis.
However, Phillips 66 might be a case where analysts are focused on the numbers rather than their underlying context. Sure, gasoline prices in the U.S. have generally been fading, and rising evidence points to a demand challenge.
Still, it’s important to note that PSX stock is generally an inelastic investment in the sense that while the pricing of the underlying product can change demand flow, most people, at the end of the day, need access to downstream fossil fuels. That’s where things can get interesting for Phillips 66.
Fundamentals Can Potentially Shift in Favor of Phillips 66
Currently, the other issue plaguing PSX stock is that the broader fundamentals don’t seem particularly supportive. As stated earlier, demand headwinds may be contributing to Phillips 66’s underperformance in the technical charts. They may also explain why analysts are so pessimistic about PSX. Still, investors might not want to get too comfortable with this narrative.
Moving forward, the dormant fundamentals could become active in favor of the downstream specialist. While tensions between Israel and Iran appear to have cooled, a new threat in the Middle East may emerge, this time impacting Israel and Lebanon. If circumstances continue to worsen, the matter could easily send oil stocks moving higher.
It’s not that anybody should wish for terrible events to materialize. However, the Middle East conflagration is occurring amid a contentious U.S. election cycle. Should more unrest impact the region, that could have a tumultuous impact on global energy supply chains.
At the same time, Russia’s invasion of Ukraine will likely also disrupt supplies. No indications exist that Russia is about to end its hostilities. Meanwhile, U.S. and Western nations continue to support Ukraine with military and financial aid.
Given that both sides have seen the weak debate performance of President Joe Biden, they’ll be anxious to generate momentum on the battlefield. That’s not great for stability. However, it could benefit PSX stock due to supply chain concerns bolstering the top and bottom lines as downstream enterprises raise their prices in response.
Is Phillips 66 Stock a Buy, According to Analysts?
Turning to Wall Street, PSX stock has a Moderate Buy consensus rating based on 10 Buys, five Holds, and zero Sell ratings. The average PSX stock price target is $155.92, implying 11.55% upside potential.
The Takeaway: PSX Stock Can Get Exciting Down the Line
At first glance, downstream energy giant Phillips 66 doesn’t seem like much of an opportunity. Due to projected declines in earnings and sales over the next two years, PSX stock appears to be contextually overpriced. Despite fading demand hurting the industry right now, geopolitical tensions could easily escalate, leading to supply chain disruptions. If so, that could help boost the company’s financials.
