The Razor’s Edge

2-Year Price History

Ockham’s Rating

Rating Specific Information Withheld Premium Access Only

MRO Revenue

As a value investing shop, we are interested in seeing how MRO’s revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock’s current underlying value. Using this method, we have established a high range for Price to Sales of 0.53x and the low end of the range at 0.32x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for MRO of 0.26x is well below its normal historic Price to Sales levels. At a price of $28.98, MRO is 39% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

MRO 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 MRO, Ockham views their current Cash Earnings as significantly below its historical average multiple of Cash Earnings. Looking at the last 10 years we can get a good understanding of what investors have grown to expect from MRO. For example, MRO’s Cash Earnings ratio per share has fluctuated between 3.93 and 6.34 over this historical timeframe. This range is based upon a proprietary weighted methodology at Ockham, but can clearly show an investor where MRO is with respect to prior business periods.

So with MRO’s current price (latest close of $28.98) and most recent level of Cash Earnings reported, we see significant opportunity from a value perspective. At its current price level, MRO is 49% below its average level of Price to Cash Earnings on a historical basis. This means that investors were willing to pay for a much higher stock price than currently for the same level of Cash in the past, on a relative basis. There are a couple of important things to remember, however. First, value doesn’t exist in a vacuum. So if the market doesn’t recognize this value, even a great disparity in Price to Cash Earnings cannot force an immediate stock price reaction. Second, patience is key when looking at securities that have reached these levels of Price to Cash Earnings versus their historical norms. So be patient with MRO.

MRO Dividends

When determining a company’s future prospects for success, Ockham Research sees analysis of dividend payments as a key additional factor. Even though it isn’t imperative for MRO to shell out a dividend in order to receive a positive rating, it can be helpful to further our analysis.

The estimated annual dividend for MRO is $0.96 producing a current dividend yield of 3.31%. Much like our evaluation of Sales and Cash Earnings per share, we review dividend yields from MRO against the historic high and low levels over all available dividend history. Because dividends are a decision made exclusively by management, we view a healthy and rising dividend as a sign of confidence and strength. The highest dividend yield from MRO over previous years was 4.96% while the lowest dividend yield was 1.37%. Management at MRO has encouraged us with a current dividend yield of 4.58% above the historical median.