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Why Phillips 66 Commands Premium Valuations

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Dec. 4 2020, Updated 10:53 a.m. ET

Phillips 66’s premium valuations

In the earlier parts of this series, we evaluated Phillips 66’s (PSX) stock performance, moving averages, and dividend yield trend. In this part, we’ll look at its forward valuation compared to its peers.

Phillips 66 (PSX) is trading at a forward PE (price-to-earnings) ratio of 15.1x, which is above its peer average of 14.5x. Even in terms of forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratios, PSX trades at 8.5x, which is above its peer average of 6.8x.

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Marathon Petroleum (MPC) and Western Refining (WNR) are also trading above the peer group average forward PE. MPC is trading above the peer average due to its restructuring exercise, which could likely unlock value for its shareholders. WNR is trading at a higher valuation since Tesoro (TSO) is in the process of acquiring it. Please refer to Western Refining Stock Rises 23% as Tesoro Moves to Acquire It.

But why the premium for PSX?

Phillips 66 is trading at a premium to its peer average probably because of the diversified nature of its earnings model. PSX focuses on increasing steady income from its midstream and marketing segments along with improving returns from its refining segment. In the scenario of a better refining environment, the markets most likely are expecting Phillips 66 to perform better than its peers.

If you want exposure to the core S&P 500 stocks, you can consider the SPDR S&P 500 ETF (SPY). SPY has a ~6.0% exposure to energy sector stocks, including MPC, TSO, and PSX.

In the next part, we’ll compare PSX’s PEG (price-to-earnings-to-growth) ratio with its peers.

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