2015 earnings estimates are projected to be less than 2014 earnings.
The stock is near fully valued on the 2015 earnings estimates.
I put my proceeds into Rowan which is extremely undervalued based on 2015 earnings estimates and earnings growth potential.
The last time I wrote about Occidental Petroleum Corporation (NYSE:OXY) I stated, "It is for these reasons I will be buying a small batch in the stock right now because I don't think anyone can pick the bottom." But that was before 2015 earnings were less than 2014 earnings. During my quarterly portfolio change-out in mid-May, I decided to sell Oxy out of the portfolio and replace it with Rowan Companies PLC (NYSE:RDC) because I believe Rowan is extremely undervalued and is in a hot industry right now. Occidental is an oil & gas production company, which operates in three segments: Oil & Gas, Chemical, and Midstream, Marketing and Other.
On May 5, 2014, the company reported first-quarter earnings of $1.75 per share, which beat the consensus analysts' estimates by $0.05. In the past year, the company's stock is up 16.98% excluding dividends (up 19.83% including dividends) and is losing to the S&P 500, which has gained 23.25% in the same time frame. I sold Oxy for a 5.34% gain or 5.6% on an annualized basis., including dollar cost averaging and reinvested dividends. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to show why I sold Oxy out of the basic materials sector of my dividend portfolio.
The company currently trades at a trailing 12-month P/E ratio of 14.16, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.48 is currently inexpensively priced for the future in terms of the right here, right now. The forward P/E value that is higher than the trailing twelve month P/E value tells us the story of earnings contraction in the next year. However, next year's estimated earnings are $7.26 per share while the trailing twelve month earnings per share were $7.43, I never like that. Next year's estimated earnings are $7.26 per share and I'd consider the stock inexpensive until about $109. The 1-year PEG ratio (14.91), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 0.95%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.
EPS Next YR ($)
Target Price ($)
EPS next YR (%)
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.74% with a payout ratio of 39% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.6%, 13.9% and 8.9%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.74% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 12 years at a 5-year dividend growth rate of 15.2%. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.
Payout TTM (%)
Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory with a current value of 71.45. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars increasing in height, indicating the bullish momentum. As for the stock price itself ($105.19), I'm looking at $110.79 to act as resistance and $101.47 to act as support for a risk/reward ratio, which plays out to be -3.54% to 5.32%.
Due to the geopolitical issues taking place in Iraq the price of oil has shot up. From a macroeconomic perspective, obviously with higher oil prices comes a higher price at the pump for the consumer. When there are higher prices at the pump, we as consumer economy begin to tighten the purse strings and not go out for dinner as much or buy those shoes we like, but instead begin to focus on the necessities in life. Analysts begin to lower growth estimates of companies when a consumer economy begins to focus just on the necessities of life. When lower forecasts by analysts are predicted for the economy, P/E ratios begin to drop and then so does the overall market and along with it, Occidental.
From a company perspective, I never like paying more for future earnings than I did in the past, because that means that earnings in the future are going to be less than what they were in the past. I always invest with my sights on the future, and increasing earnings is what should happen in the future. The company plans to spinoff its California assets later in this year which is definitely a catalyst. Fundamentally, I believe the stock to be almost fully valued on next year's earnings estimates but expensive on growth potential. Financially, the dividend is pretty good and the financial efficiency ratios have increased dramatically from six months ago. On a technical basis, the stock is in overbought territory and it can come down. I don't like buying a stock when it's near overbought territory and coupled with near fair valuation on next year's earnings estimates and decreased earnings expectations don't make me too enthusiastic on the stock. I'm going to stay on the sidelines again in this name for right now.
Because I swapped out Oxy for Rowan in my dividend portfolio it is only fair that I provide an update from the swap-out date. From 19May14, Oxy is up 9.92% while Rowan is up 8.07% and the S&P500 is up 4.5%. The trade is not too far off, only more time will tell if it was good.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: The author is long RDC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.