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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Phillips 66

September 6th 2015

Phillips 66

NYSE Symbol: PSX
Industry: Refining/Chemicals

Price as of 9/4: $77.20

 

 

The correction continues. August finished out down 6% or more for most of the major averages, the weakest month in five years. September hasn't started any better with a 3% decline this week. The third longest bull run without a 10% correction is over. The Dow is down over 12% from the May highs and 10% for the year. The S&P 500 is down over 6% for the year and down 10% from the May highs. Sell in May and go away ring any bells?? If history is any indication we should correct further in the coming weeks with a retest of the August lows. We may even decline further before an eventual rally. August and September are statistically the two worst months of the year, but the good news is October begins the best six months to invest with an average of 5% annually just for October-November-December period for the last 20 years. There seems to be no rush to buy anything right now, but it's a good time to make a wish list. Blue chip stocks that look good if they get a little cheaper include Apple, Disney, Boeing, American Airlines, Delta, Goldman Sachs, & Gilead Science. For a while I've been suggesting to avoid anything energy related. China is definitely slowing and energy and commodity related stocks rely on China and the Asian region for demand, but last week Warren Buffett disclosed he increased his position in the energy space and this week we'll feature that stock, Phillips 66. Phillips 66 is not your typical energy stock. The company gets a majority of its profits from refining and chemicals which do not hinge on higher oil prices. So while most energy related stocks are lowering earnings estimates, Phillips 66 has actually improved this year's estimates and maintained next year's estimates. Phillips 66 may remain under pressure as long as the broader market remains under pressure, but with Warren Buffett on their side, Phillips 66 looks like once of the few stocks in the energy space with strong short term and long term fundamentals.

Back at the end of July, the Houston based company reported earnings of $1 billion or $1.83 a share beating estimates by 2 cents. Revenue came in at 29.08 billion. Management indicated that their Refining, Chemicals, and M&S businesses delivered a strong quarter, providing solid earnings and cash flow. They also retuned more than $600 million to shareholders through dividends and share repurchases. Phillips 66s increased quarterly dividend 12% to $0.56/share. The return of $$636 million to shareholders came in the form of $302 million in dividends and $334 million in repurchases of 4.2 million shares of common stock. Since July 2012, the company has repurchased 83 million shares for $5.6 billion and increased its quarterly dividend by 180 percent to $0.56. Phillips 66 ended the quarter with 538 million shares outstanding and $1.4 billion of remaining capacity under its current share repurchase authorization.

Warren Buffett's Berkshire Hathaway current stake in Phillips66 stands at 58 million shares or $4.5 billion for a 10.8% stake in the company. Currently, Phillips 66 trades for 0.37 times sales, 12 times earnings, 11 times 2016 earnings, and sports a 2.9% dividend yield. Since being spun off from Conoco, Phillips 66 has more than doubled their dividend and issued share buybacks by which they've reduced their share count by 14%. Going forward, Phillips 66 will look to expand non-refining business to grow earnings and sales once the energy space rebounds. Looks like Phillips 66 is well positioned to capitalize on the recent oil weakness and benefit from the eventual rebound once it comes. Warren Buffett has a great track record of being right.