Intrinsic value of Phillips 66 - PSX

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$76.35

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$76.35

 
Intrinsic value

$113.73

 
Up/down potential

+49%

 
Rating

buy

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of PSX stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 39.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -14.39
  7.70
  7.43
  7.19
  6.97
  6.77
  6.59
  6.43
  6.29
  6.16
  6.05
  5.94
  5.85
  5.76
  5.69
  5.62
  5.56
  5.50
  5.45
  5.41
  5.36
  5.33
  5.30
  5.27
  5.24
  5.22
  5.19
  5.17
  5.16
  5.14
  5.13
Revenue, $m
  84,730
  91,254
  98,034
  105,080
  112,402
  120,014
  127,928
  136,160
  144,726
  153,645
  162,934
  172,615
  182,708
  193,237
  204,225
  215,697
  227,681
  240,204
  253,296
  266,987
  281,311
  296,300
  311,990
  328,419
  345,626
  363,651
  382,539
  402,333
  423,082
  444,833
  467,641
Variable operating expenses, $m
 
  71,883
  77,200
  82,725
  88,466
  94,435
  100,640
  107,095
  113,813
  120,806
  128,090
  135,354
  143,269
  151,525
  160,141
  169,137
  178,534
  188,354
  198,620
  209,356
  220,587
  232,341
  244,644
  257,527
  271,019
  285,154
  299,964
  315,486
  331,755
  348,812
  366,696
Fixed operating expenses, $m
 
  17,422
  17,857
  18,304
  18,762
  19,231
  19,711
  20,204
  20,709
  21,227
  21,758
  22,302
  22,859
  23,431
  24,016
  24,617
  25,232
  25,863
  26,510
  27,172
  27,852
  28,548
  29,262
  29,993
  30,743
  31,511
  32,299
  33,107
  33,934
  34,783
  35,652
Total operating expenses, $m
  83,325
  89,305
  95,057
  101,029
  107,228
  113,666
  120,351
  127,299
  134,522
  142,033
  149,848
  157,656
  166,128
  174,956
  184,157
  193,754
  203,766
  214,217
  225,130
  236,528
  248,439
  260,889
  273,906
  287,520
  301,762
  316,665
  332,263
  348,593
  365,689
  383,595
  402,348
Operating income, $m
  1,405
  1,949
  2,977
  4,052
  5,175
  6,349
  7,576
  8,860
  10,204
  11,612
  13,086
  14,959
  16,580
  18,281
  20,067
  21,944
  23,915
  25,987
  28,167
  30,459
  32,872
  35,411
  38,084
  40,899
  43,864
  46,986
  50,275
  53,741
  57,392
  61,239
  65,292
EBITDA, $m
  2,573
  3,368
  4,477
  5,636
  6,846
  8,111
  9,433
  10,816
  12,262
  13,777
  15,362
  17,024
  18,766
  20,593
  22,510
  24,524
  26,638
  28,861
  31,197
  33,653
  36,237
  38,955
  41,816
  44,828
  47,998
  51,336
  54,851
  58,553
  62,452
  66,560
  70,886
Interest expense (income), $m
  311
  336
  414
  494
  578
  665
  755
  849
  947
  1,048
  1,154
  1,264
  1,379
  1,499
  1,624
  1,755
  1,891
  2,033
  2,182
  2,337
  2,499
  2,669
  2,847
  3,034
  3,229
  3,433
  3,647
  3,871
  4,106
  4,352
  4,610
Earnings before tax, $m
  2,191
  1,614
  2,563
  3,557
  4,597
  5,684
  6,821
  8,011
  9,258
  10,563
  11,932
  13,694
  15,201
  16,782
  18,443
  20,189
  22,024
  23,954
  25,985
  28,123
  30,372
  32,742
  35,237
  37,866
  40,635
  43,553
  46,629
  49,870
  53,286
  56,887
  60,682
Tax expense, $m
  547
  436
  692
  961
  1,241
  1,535
  1,842
  2,163
  2,500
  2,852
  3,222
  3,698
  4,104
  4,531
  4,980
  5,451
  5,947
  6,468
  7,016
  7,593
  8,201
  8,840
  9,514
  10,224
  10,971
  11,759
  12,590
  13,465
  14,387
  15,359
  16,384
Net income, $m
  1,555
  1,178
  1,871
  2,597
  3,356
  4,149
  4,979
  5,848
  6,758
  7,711
  8,710
  9,997
  11,097
  12,251
  13,464
  14,738
  16,078
  17,487
  18,969
  20,529
  22,172
  23,901
  25,723
  27,642
  29,664
  31,794
  34,039
  36,405
  38,899
  41,527
  44,298

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,711
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  51,653
  52,718
  56,635
  60,705
  64,935
  69,332
  73,904
  78,660
  83,608
  88,761
  94,127
  99,720
  105,550
  111,633
  117,981
  124,608
  131,532
  138,766
  146,329
  154,239
  162,513
  171,172
  180,237
  189,728
  199,668
  210,082
  220,993
  232,428
  244,415
  256,981
  270,156
Adjusted assets (=assets-cash), $m
  48,942
  52,718
  56,635
  60,705
  64,935
  69,332
  73,904
  78,660
  83,608
  88,761
  94,127
  99,720
  105,550
  111,633
  117,981
  124,608
  131,532
  138,766
  146,329
  154,239
  162,513
  171,172
  180,237
  189,728
  199,668
  210,082
  220,993
  232,428
  244,415
  256,981
  270,156
Revenue / Adjusted assets
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
  1.731
Average production assets, $m
  21,185
  22,814
  24,509
  26,270
  28,101
  30,003
  31,982
  34,040
  36,182
  38,411
  40,734
  43,154
  45,677
  48,309
  51,056
  53,924
  56,920
  60,051
  63,324
  66,747
  70,328
  74,075
  77,997
  82,105
  86,406
  90,913
  95,635
  100,583
  105,770
  111,208
  116,910
Working capital, $m
  3,217
  1,095
  1,176
  1,261
  1,349
  1,440
  1,535
  1,634
  1,737
  1,844
  1,955
  2,071
  2,192
  2,319
  2,451
  2,588
  2,732
  2,882
  3,040
  3,204
  3,376
  3,556
  3,744
  3,941
  4,148
  4,364
  4,590
  4,828
  5,077
  5,338
  5,612
Total debt, $m
  10,138
  11,820
  14,119
  16,509
  18,992
  21,573
  24,257
  27,048
  29,953
  32,977
  36,128
  39,410
  42,833
  46,404
  50,130
  54,020
  58,084
  62,331
  66,770
  71,413
  76,270
  81,353
  86,674
  92,245
  98,080
  104,193
  110,598
  117,310
  124,346
  131,723
  139,457
Total liabilities, $m
  29,263
  30,945
  33,244
  35,634
  38,117
  40,698
  43,382
  46,173
  49,078
  52,102
  55,253
  58,535
  61,958
  65,529
  69,255
  73,145
  77,209
  81,456
  85,895
  90,538
  95,395
  100,478
  105,799
  111,370
  117,205
  123,318
  129,723
  136,435
  143,471
  150,848
  158,582
Total equity, $m
  22,390
  21,772
  23,390
  25,071
  26,818
  28,634
  30,522
  32,486
  34,530
  36,658
  38,874
  41,184
  43,592
  46,104
  48,726
  51,463
  54,323
  57,310
  60,434
  63,701
  67,118
  70,694
  74,438
  78,358
  82,463
  86,764
  91,270
  95,993
  100,943
  106,133
  111,575
Total liabilities and equity, $m
  51,653
  52,717
  56,634
  60,705
  64,935
  69,332
  73,904
  78,659
  83,608
  88,760
  94,127
  99,719
  105,550
  111,633
  117,981
  124,608
  131,532
  138,766
  146,329
  154,239
  162,513
  171,172
  180,237
  189,728
  199,668
  210,082
  220,993
  232,428
  244,414
  256,981
  270,157
Debt-to-equity ratio
  0.453
  0.540
  0.600
  0.660
  0.710
  0.750
  0.790
  0.830
  0.870
  0.900
  0.930
  0.960
  0.980
  1.010
  1.030
  1.050
  1.070
  1.090
  1.100
  1.120
  1.140
  1.150
  1.160
  1.180
  1.190
  1.200
  1.210
  1.220
  1.230
  1.240
  1.250
Adjusted equity ratio
  0.402
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413
  0.413

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,555
  1,178
  1,871
  2,597
  3,356
  4,149
  4,979
  5,848
  6,758
  7,711
  8,710
  9,997
  11,097
  12,251
  13,464
  14,738
  16,078
  17,487
  18,969
  20,529
  22,172
  23,901
  25,723
  27,642
  29,664
  31,794
  34,039
  36,405
  38,899
  41,527
  44,298
Depreciation, amort., depletion, $m
  1,168
  1,419
  1,500
  1,584
  1,672
  1,763
  1,857
  1,956
  2,058
  2,165
  2,276
  2,065
  2,186
  2,311
  2,443
  2,580
  2,723
  2,873
  3,030
  3,194
  3,365
  3,544
  3,732
  3,928
  4,134
  4,350
  4,576
  4,813
  5,061
  5,321
  5,594
Funds from operations, $m
  3,464
  2,596
  3,371
  4,181
  5,027
  5,912
  6,837
  7,804
  8,816
  9,876
  10,986
  12,062
  13,282
  14,562
  15,907
  17,318
  18,801
  20,360
  21,999
  23,723
  25,537
  27,446
  29,455
  31,570
  33,798
  36,144
  38,615
  41,217
  43,959
  46,848
  49,892
Change in working capital, $m
  501
  78
  81
  85
  88
  91
  95
  99
  103
  107
  111
  116
  121
  126
  132
  138
  144
  150
  157
  164
  172
  180
  188
  197
  206
  216
  227
  238
  249
  261
  274
Cash from operations, $m
  2,963
  3,076
  3,290
  4,096
  4,939
  5,820
  6,742
  7,705
  8,713
  9,769
  10,875
  11,946
  13,161
  14,436
  15,775
  17,180
  18,657
  20,210
  21,842
  23,559
  25,365
  27,266
  29,267
  31,373
  33,591
  35,927
  38,388
  40,980
  43,710
  46,587
  49,618
Maintenance CAPEX, $m
  0
  -1,014
  -1,092
  -1,173
  -1,257
  -1,345
  -1,436
  -1,530
  -1,629
  -1,731
  -1,838
  -1,949
  -2,065
  -2,186
  -2,311
  -2,443
  -2,580
  -2,723
  -2,873
  -3,030
  -3,194
  -3,365
  -3,544
  -3,732
  -3,928
  -4,134
  -4,350
  -4,576
  -4,813
  -5,061
  -5,321
New CAPEX, $m
  -2,844
  -1,629
  -1,695
  -1,761
  -1,831
  -1,903
  -1,979
  -2,058
  -2,142
  -2,230
  -2,322
  -2,420
  -2,523
  -2,632
  -2,747
  -2,868
  -2,996
  -3,131
  -3,273
  -3,423
  -3,581
  -3,747
  -3,923
  -4,107
  -4,302
  -4,506
  -4,722
  -4,949
  -5,187
  -5,438
  -5,702
Cash from investing activities, $m
  -3,158
  -2,643
  -2,787
  -2,934
  -3,088
  -3,248
  -3,415
  -3,588
  -3,771
  -3,961
  -4,160
  -4,369
  -4,588
  -4,818
  -5,058
  -5,311
  -5,576
  -5,854
  -6,146
  -6,453
  -6,775
  -7,112
  -7,467
  -7,839
  -8,230
  -8,640
  -9,072
  -9,525
  -10,000
  -10,499
  -11,023
Free cash flow, $m
  -195
  434
  503
  1,162
  1,852
  2,573
  3,328
  4,117
  4,943
  5,808
  6,715
  7,576
  8,573
  9,618
  10,716
  11,869
  13,081
  14,355
  15,696
  17,106
  18,591
  20,154
  21,800
  23,534
  25,361
  27,287
  29,316
  31,456
  33,711
  36,088
  38,595
Issuance/(repayment) of debt, $m
  1,257
  2,232
  2,299
  2,389
  2,483
  2,581
  2,684
  2,792
  2,905
  3,024
  3,150
  3,283
  3,423
  3,570
  3,726
  3,891
  4,064
  4,247
  4,440
  4,643
  4,857
  5,083
  5,321
  5,571
  5,835
  6,113
  6,405
  6,712
  7,036
  7,376
  7,734
Issuance/(repurchase) of shares, $m
  -82
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  1,104
  2,232
  2,299
  2,389
  2,483
  2,581
  2,684
  2,792
  2,905
  3,024
  3,150
  3,283
  3,423
  3,570
  3,726
  3,891
  4,064
  4,247
  4,440
  4,643
  4,857
  5,083
  5,321
  5,571
  5,835
  6,113
  6,405
  6,712
  7,036
  7,376
  7,734
Total cash flow (excl. dividends), $m
  919
  2,666
  2,802
  3,552
  4,335
  5,154
  6,011
  6,908
  7,848
  8,833
  9,865
  10,859
  11,996
  13,189
  14,442
  15,760
  17,145
  18,602
  20,135
  21,749
  23,448
  25,237
  27,121
  29,105
  31,196
  33,399
  35,721
  38,168
  40,747
  43,465
  46,329
Retained Cash Flow (-), $m
  710
  -1,543
  -1,618
  -1,681
  -1,747
  -1,816
  -1,888
  -1,964
  -2,044
  -2,128
  -2,216
  -2,310
  -2,408
  -2,512
  -2,622
  -2,737
  -2,859
  -2,988
  -3,124
  -3,267
  -3,417
  -3,576
  -3,744
  -3,920
  -4,105
  -4,301
  -4,506
  -4,723
  -4,950
  -5,190
  -5,442
Prev. year cash balance distribution, $m
 
  2,161
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  3,284
  1,185
  1,870
  2,588
  3,338
  4,123
  4,944
  5,804
  6,705
  7,648
  8,550
  9,587
  10,677
  11,821
  13,023
  14,286
  15,614
  17,012
  18,482
  20,030
  21,660
  23,377
  25,185
  27,091
  29,099
  31,215
  33,445
  35,796
  38,275
  40,888
Discount rate, %
 
  5.30
  5.57
  5.84
  6.14
  6.44
  6.76
  7.10
  7.46
  7.83
  8.22
  8.63
  9.06
  9.52
  9.99
  10.49
  11.02
  11.57
  12.15
  12.76
  13.39
  14.06
  14.77
  15.50
  16.28
  17.09
  17.95
  18.85
  19.79
  20.78
  21.82
PV of cash for distribution, $m
 
  3,119
  1,063
  1,577
  2,039
  2,443
  2,784
  3,059
  3,265
  3,402
  3,471
  3,438
  3,384
  3,274
  3,115
  2,915
  2,683
  2,428
  2,160
  1,889
  1,622
  1,367
  1,130
  915
  726
  563
  427
  316
  228
  160
  110
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Phillips 66 operates as an energy manufacturing and logistics company. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). The Midstream segment gathers, processes, transports, and markets natural gas; transports, stores, fractionates, and markets natural gas liquids in the United States; and stores, refrigerates, and exports liquefied petroleum gas (LPG) primarily to Asia and Europe. This segment also transports crude oil and other feedstocks to its refineries and other locations, as well as delivers refined and specialty products, and provides terminaling and storage services for crude oil and petroleum products. The Chemicals segment manufactures and markets ethylene and other olefin products; aromatics and styrenics products, such as benzene, styrene, paraxylene, and cyclohexane, as well as polystyrene and styrene-butadiene copolymers; and various specialty chemical products, including organosulfur chemicals, solvents, catalysts, drilling chemicals, and mining chemicals. The Refining segment buys, sells, and refines crude oil and other feedstocks into petroleum products comprising gasolines, distillates, and aviation fuels at 13 refineries primarily in the United States and Europe. The M&S segment purchases for resale and markets refined petroleum products consisting of gasolines, distillates, and aviation fuels primarily in the United States and Europe. It also manufactures and sells specialty products, such as petroleum coke products, waxes, solvents, and polypropylene. In addition, this segment generates electricity and provides merchant power into the Texas market. Phillips 66 was founded in 1875 and is headquartered in Houston, Texas.

FINANCIAL RATIOS  of  Phillips 66 (PSX)

Valuation Ratios
P/E Ratio 25.5
Price to Sales 0.5
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 13.4
Price to Free Cash Flow 332.8
Growth Rates
Sales Growth Rate -14.4%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -50.7%
Cap. Spend. - 3 Yr. Gr. Rate 9.8%
Financial Strength
Quick Ratio 5
Current Ratio 0.1
LT Debt to Equity 42.8%
Total Debt to Equity 45.3%
Interest Coverage 8
Management Effectiveness
Return On Assets 3.6%
Ret/ On Assets - 3 Yr. Avg. 7.6%
Return On Total Capital 4.8%
Ret/ On T. Cap. - 3 Yr. Avg. 11.6%
Return On Equity 6.8%
Return On Equity - 3 Yr. Avg. 15.9%
Asset Turnover 1.7
Profitability Ratios
Gross Margin 26.2%
Gross Margin - 3 Yr. Avg. 22.6%
EBITDA Margin 4.3%
EBITDA Margin - 3 Yr. Avg. 5.4%
Operating Margin 1.7%
Oper. Margin - 3 Yr. Avg. 2.7%
Pre-Tax Margin 2.6%
Pre-Tax Margin - 3 Yr. Avg. 4.1%
Net Profit Margin 1.8%
Net Profit Margin - 3 Yr. Avg. 3%
Effective Tax Rate 25%
Eff/ Tax Rate - 3 Yr. Avg. 27.6%
Payout Ratio 82.4%

PSX stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PSX stock intrinsic value calculation we used $84730 million for the last fiscal year's total revenue generated by Phillips 66. The default revenue input number comes from 2016 income statement of Phillips 66. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our PSX stock valuation model: a) initial revenue growth rate of 7.7% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5.3%, whose default value for PSX is calculated based on our internal credit rating of Phillips 66, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Phillips 66.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of PSX stock the variable cost ratio is equal to 78.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $16997 million in the base year in the intrinsic value calculation for PSX stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for Phillips 66.

Corporate tax rate of 27% is the nominal tax rate for Phillips 66. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the PSX stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for PSX are equal to 25%.

Life of production assets of 20.9 years is the average useful life of capital assets used in Phillips 66 operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for PSX is equal to 1.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $22390 million for Phillips 66 - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 521.081 million for Phillips 66 is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Phillips 66 at the current share price and the inputted number of shares is $39.8 billion.


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Stock chart of PSX Financial statements of PSX
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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