What is PSX's Intrinsic value?

Phillips 66 (PSX) Intrinsic Value Analysis

Executive Summary

As of May 22, 2025, Phillips 66's estimated intrinsic value ranges from $96.69 to $424.29 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $424.29 +279.6%
Discounted Cash Flow (5Y) $337.08 +201.6%
Dividend Discount Model (Multi-Stage) $320.53 +186.8%
Dividend Discount Model (Stable) $96.69 -13.5%
Earnings Power Value $334.17 +199.0%

Is Phillips 66 (PSX) undervalued or overvalued?

With the current market price at $111.78, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Phillips 66's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.6 1.03
Cost of equity 6.6% 10.7%
Cost of debt 4.2% 7.5%
Tax rate 20.8% 22.7%
Debt/Equity ratio 0.39 0.39
After-tax WACC 5.7% 9.3%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 7.5% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $143,153 (FY12-2024) to $160,766 (FY12-2034)
  • Net profit margin expansion from 2% to 8%
  • Capital expenditures maintained at approximately 2% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $337 $154,653M 84.1%
10-Year Growth $424 $190,186M 69.4%
5-Year EBITDA $233 $112,104M 78.0%
10-Year EBITDA $303 $140,704M 58.6%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 102.5%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 8.6%
  • Long-term growth rate: 3.0%
  • Fair value: $320.53 (186.8% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 10.7% (Low) to 6.6% (High)
  • Long-term growth rate: 2.0% (Low) to 4.0% (High)
  • Fair value range: $37 to $157
  • Selected fair value: $96.69 (-13.5% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $10,831M
Discount Rate (WACC) 9.3% - 5.7%
Enterprise Value $116,713M - $190,223M
Net Debt $17,314M
Equity Value $99,399M - $172,909M
Outstanding Shares 407M
Fair Value $244 - $424
Selected Fair Value $334.17

Key Financial Metrics

Metric Value
Market Capitalization $45544M
Enterprise Value $62858M
Trailing P/E 24.54
Forward P/E 13.06
Trailing EV/EBITDA 8.90
Current Dividend Yield 371.48%
Dividend Growth Rate (5Y) 4.55%
Debt-to-Equity Ratio 0.39

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 30% $127.29
Discounted Cash Flow (5Y) 25% $84.27
Dividend Discount Model (Multi-Stage) 20% $64.11
Dividend Discount Model (Stable) 15% $14.50
Earnings Power Value 10% $33.42
Weighted Average 100% $323.58

Investment Conclusion

Based on our comprehensive valuation analysis, Phillips 66's weighted average intrinsic value is $323.58, which is approximately 189.5% above the current market price of $111.78.

Key investment considerations:

  • Strong projected earnings growth (2% to 8% margin)
  • Consistent cash flow generation
  • Historical dividend growth of 4.55%

Given these factors, we believe Phillips 66 is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.