The Razor's Edge

2-Year Price History

Ockham's Rating

COP Stock Evaluation

While there has not been a significant change to price or fundamental factors associated with COP this week, the stock still receives a downgrade in the latest report. We as always are interested in analyzing any changes in fundamentals for each stock, but it is also important to get an idea of the overall valuation of the entire sector. The reason for this downgrade is that we have seen marked erosion in valuation for COP's sector, the Basic Materials sector. The sector's valuation has become less attractive compared to the other sectors we rank. For more on this topic, please refer to the Peer Comparison portion of our analysis, which will highlight where the Basic Materials sector ranks among other sectors and also includes a peer analysis of COP.

COP Revenue

As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, COP the high and low end of the Price to Sales per share ratios are 0.71x and 0.45x respectively.

Notice that COP's current Price to Sales per share ratio is 0.36x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $52.52, COP is 38% below where we would expect to see it. This will beneficially factor into our final analysis of COP as it is not often that this stock sinks to these levels.

COP Cash Earnings

As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of COP, Ockham views their current Cash Earnings as significantly below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for COP, the current level of Cash Earnings compared to its historical levels helps identify where COP is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 6.87 and a historical low Cash Earnings per share ratio of 4.41, an investor can relate where value becomes optimal.

So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for COP? From the Ockham perspective, we are looking specifically at COP to see if the market is recognizing the huge disparity between COP's past stock price to Cash Earnings ratio to today's levels. At a difference of 56% below the average historical Price to Cash Earnings ratio, our view would be quite positive at this point. However, as with all metrics, we need to also take other factors into account when looking at COP. While we view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, we would become more neutral in our stance.

COP Dividends

While it is not necessary to pay an attractive dividend or a dividend at all, to receive a positive rating from Ockham, we view dividends as an additionally helpful measure in determining the future potential of any company.

In COP’s case, the estimated annual dividend is $1.88 resulting in a current dividend yield of 3.58%. Similar to our review of Sales and Cash Earnings per share, we evaluate dividend yields from COP against the historic high and low levels over the past 10 years. The highest dividend yield from COP over this period was 4.56% while the lowest dividend yield was 1.66% COP’s current dividend yield is therefore significantly higher than its median dividend yield historically. In fact, the current yield is 15.11% above the median which weighs very positively on our analysis of COP.