By arguably most measures, the oil and gas industry suffers a seeming date with inevitable obsolescence, which logically hurts the case of downstream energy specialist Phillips 66 (NYSE:PSX). However, PSX stock has given stakeholders a reason to smile. Better yet, the investment can still see more gains. Therefore, I am bullish on the oil giant.
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PSX Stock Cynically Rises on Harsh Economic Realities
To be fair, advocates of electric vehicles (EVs) appear to be rooting for the young team steadily building a championship winner. On the other end, PSX stock appears an aging veteran just trying to hold onto one last outing. Eventually, the political and ideological winds seem poised to replace combustion-powered transportation. However, those that believe this argument got hit with some harsh economic realities.
Specifically, more Americans are holding onto their commuter cars for longer, suggesting a surprisingly viable canvas for PSX stock. Last year, The Wall Street Journal cited data that showed the average age of passenger cars on U.S. roadways hit a then-record 12.2 years.
Fast forward to this year, and S&P Global Mobility – the originator of the above research item – stated that the underlying metric hit 12.5 years. Further, under the sedan category, the average age jumped to 13.6 years.
Obviously, investors can parse this data in multiple ways. For example, it’s possible that sales at used-car dealerships like CarMax (NYSE:KMX) may blossom because cars can’t last indefinitely. Also, it’s possible that in the meantime, demand for aftermarket parts providers may skyrocket.
However, the bottom line is that because of the tough economic backdrop of high inflation and now high borrowing costs, consumers will likely maintain combustion engines as their preferred mobility power source. While downward price adjustments have materialized, the average EV tends to be priced higher than what many households can comfortably afford.
Like it or not, PSX stock benefits from a surprisingly large addressable market.
Phillips 66 Gets a Little Help from Social Transitions
Back when the COVID-19 outbreak first capsized global communities, PSX stock and its ilk became one of the worst investments. With oil futures at one point going negative, few wanted to touch the hydrocarbon space. Plus, the remote work phenomenon meant that millions of people would be parking their cars in their garages. However, this circumstance may change, thus providing a lift for Phillips 66 and other downstream players.
Since around the middle of last year, companies have increasingly implemented return-to-office mandates. It appears most of these mandates represent hybrid schedules, mixing in-office days with remote days. Regardless, the main point for PSX stock is that millions of white-collar workers must endure the daily commute grind. It’s cynical, but the increased congestion on roadways signals greater demand for Phillips 66.
To be sure, a recession might throw a monkey wrench into the aforementioned narrative. However, an economic downturn will also spark desperation within the workforce as mass layoffs materialize. The bottom line here is that if the only barrier to getting a job or waiting in the breadline comes down to the willingness to work in-office or not, you can bet that desperate workers will acquiesce.
In other words, it’s easy to act tough when negotiating from a position of strength. However, when your back is to the wall, hubris tends to go out the window.
Trading at a Discount
After struggling through a tough year in 2020 when Phillips 66 posted revenue of “only” $64.13 billion – down from 2019’s sales haul of $107.29 billion – circumstances have rebounded and normalized. For example, in 2021, the energy giant rang up revenue of $114.48 billion. Last year, it posted just under $170 billion. Even better, PSX stock trades at a discount.
For instance, the market prices PSX at a trailing-year revenue multiple of 0.3x. In contrast, the average sales multiple of the oil and gas distribution segment stands at a much loftier 1.54x. Indeed, within the hydrocarbon sector, only the oilfield services and equipment space carries a sub-1x revenue multiple. Even then, PSX trades at a lower ratio.
On the profitability side, PSX stock trades at a forward (projected) earnings multiple of 8.34x. Here too, shares are undervalued relative to the oil and gas distribution sector’s average forward multiple of 12.79X. Therefore, Phillips 66 deserves some attention.
Is PSX Stock a Buy, According to Analysts?
Turning to Wall Street, PSX stock has a Moderate Buy consensus rating based on eight Buys, three Holds, and zero Sell ratings. The average PSX stock price target is $122.82, implying 9.55% upside potential.
Also, on TipRanks, PSX stock has a ‘Perfect 10’ on the Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
The Takeaway: PSX Stock Offers Relevance for Our Times
While the electrification of mobility may be the future, that future may be on hold due to the unique circumstances of the post-COVID economy. Until circumstances change holistically, the hydrocarbon industry commands surprising relevance. As such, PSX stock offers an enticing bullish argument.
