uploads///Historical Valuations

Why Are Marathon Petroleum’s Valuations Lower than Its Past Averages?


Aug. 26 2016, Updated 3:05 p.m. ET

Marathon Petroleum’s valuations

Marathon Petroleum (MPC) has traded at an average PE (price-to-earnings) ratio of 10.2x from 2Q14 to 2Q16. The PE ratio measures the company’s price per share as a multiple of earnings per share.

Marathon Petroleum’s PE ratio fell from 11.3x in 2Q14 to 8.1x in 3Q15 due to rising earnings. However, in 4Q15, MPC’s earnings slumped, resulting in a rise in its PE ratio to 10.2x. However, in January 2016, MPC’s stock prices fell sharply, resulting in a fall in its PE ratio.

During the same period, the stock prices of refiners Tesoro (TSO), PBF Energy (PBF), and Phillips 66 (PSX) also fell. In 2Q16, MPC traded at a PE of 9.8x, which is below its historical average.

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MPC’s EV-to-EBITDA and price-to-cashflow ratios

From 2Q14–2Q16, Marathon Petroleum’s (MPC) EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] and price-to-cashflow ratios stood at an average of 6.0x and 6.8x, respectively. Enterprise value (or EV) is broadly defined as market capitalization plus debt minus cash. EV reflects the theoretical purchase value of the entire firm.

Similar to its PE ratio, MPC’s EV-to-EBITDA and price-to-cashflow ratios fell. However, in 2Q16, Marathon Petroleum (MPC) traded at 7.1x EV-to-EBITDA, marginally above its historical average. In 2Q16, MPC traded at 4.5x price-to-cashflow, lower than its historical average.

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Why are Marathon Petroleum’s PE and price-to-cashflow ratios lower than its historical averages?

Our valuation study reveals that Marathon Petroleum (MPC) is trading at valuations below its historical averages. This is due to the fact that MPC’s stock price has fallen steeply compared to fall in its earnings and cash flows. This is likely due to the steep upsurge in Marathon Petroleum’s (MPC) debt level after the acquisition of MarkWest Energy.

MPC appears to be on a growth trajectory. However, the rise in debt levels is likely weighing on the stock.


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