Using Ratios To Identify Stocks Set To Outperform Their Peers: Oil Rankings Update

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Includes: ANDV, MPC, RDS.A, VLO, XOM
by: Stock Scrutiny

Summary

Updated rankings for big oil companies using my previously introduced system of ratios is presented.

Comparison of last year's results to scores with this year's, showing a few interesting trends that are worth looking into.

I then show how each of the ranked stocks have performed since the beginning of the year and the current correlation.

Introduction

For those who weren't able to read the first article of this series, I introduced a stock rating system utilizing ratios that I created a little over a year ago. That piece, among other things, shows how I look at debt, profitability, efficiency, and growth aspects of a business and attempt to quantify where each company stands among its peers with a single number. My hypothesis is that companies who, on average, are better-positioned financially than their competition (according to my system) will outperform the stocks who have less sound balance sheets in the long run. For my complete process, please see my introductory article here.

Since cross-sector comparisons of ratios aren't valuable, I did several separate analyses with different industries of focus. These rankings and updated scores will be outlined in future articles, along with new industries being added in hopes to add to the validity of the results. This piece marks the first of such articles, with major oil companies being the subject at hand. The 5 companies included in this analysis are Exxon (XOM), Valero (VLO), Andeavor (ANDV), Marathon Petroleum (MPC), and Royal Dutch Shell (RDS.A). The new ratios and scores are calculated using each stock's 2017 fiscal year results (all ending on December 31 2017).

Ratio Research

Debt

XOM

VLO

ANDV

MPC

RDS.A

Current Ratio

.8 (5)

1.7 (2)

1.41 (3)

1.73 (1)

1.2 (4)

Quick Ratio

.5 (5)

1.09 (2)

.64 (4)

1.12 (1)

.9 (3)

Current Liquidity Ratio

662 (4)

347.62 (1)

998 (5)

412.38 (2)

609.95 (3)

Defense Interval

6.37 (4)

23.16 (2)

6.11 (5)

18.5 (3)

29.47 (1)

Interest Coverage Ratio

19.54 (1)

8.25 (2)

3.81 (5)

5.62 (4)

7.61 (3)

Debt/Equity Ratio

.22 (1)

.41 (2)

.91 (4)

1.15 (5)

.45 (3)

Current Debt Scores

1. Valero- (2 + 2 + 1 + 2 + 2 + 2) / 6 = 1.83

2. Marathon- (1 + 1 + 2 + 3 + 4 + 5) / 6 = 2.67

3. Shell- (4 + 3 + 3 + 1 + 3 + 3) / 6 = 2.83

4. Exxon- (5 + 5 + 4 + 4 + 1 + 1) / 6 = 3.33

5. Andeavor- (3 + 4 + 5 + 5 + 5 + 4) / 6 = 4.33

While these ratios can help see the general placement of a company and its peers in regards to debt, it's also useful to see how each company scored in the past:

Valero 2016 Debt Score- 2

Marathon 2016 Debt Score- 4

Shell 2016 Debt Score- 3.33

Exxon 2016 Debt Score- 3.33

Andeavor 2016 Debt Score- 2.33

Valero, Marathon, and Shell each improved their debt scores, with Marathon gaining the most ground and catapulting itself into 2nd place among the 5 companies. Exxon's average place remained consistent with last year's, which left Andeavor's score to drop an entire 2 points- a drastic change in just one year.

Profitability

XOM

VLO

ANDV

MPC

RDS. A

Gross Margin

32.27% (1)

9.7% (5)

17.63% (3)

10.76% (4)

17.67% (2)

Operating Margin

5.33% (2)

3.92% (5)

4.4% (4)

5.28% (3)

6.18% (1)

Net Margin

6.04% (1)

2.59% (4)

2.33% (5)

3.13% (3)

5.52% (2)

Effective Tax Rate

26.99% (2)

27.1% (3)

30.58% (5)

29.52% (4)

22.94% (1)

ROA

4.21% (4)

5.36% (1)

3.68% (5)

5.07% (2)

4.34% (3)

Profit Per Employee

$283,542 (2)

$419,777 (1)

$129,461 (4)

$86,849 (5)

$146,032 (3)

Current Profitability Scores

1. Exxon- (1 + 2 + 1 + 2 + 4 + 2) / 6 = 2

2. Shell- (2 + 1 + 2 + 1 + 3 + 3) / 6 = 2

3. Valero- (5 + 5 + 4 + 3 + 1 + 1) / 6 = 3.17

4. Marathon- (4 + 3 + 3 + 4 + 2 + 5) / 6 = 3.5

5. Andeavor- (3 + 4 + 5 + 5 + 5 + 4) / 6 = 4.33

It seems that at the moment, Exxon and Royal Dutch Shell have a level of profitability that Marathon and Andeavor lack, whereas Valero falls in between the two ends of the spectrum. For further perspective, here are last year's profitability numbers:

Exxon 2016 Profitability Score- 2.67

Shell 2016 Profitability Score- 3.67

Valero 2016 Profitability Score- 2.67

Marathon 2016 Profitability Score- 3.5

Andeavor 2016 Profitability Score- 2.5

Exxon and Shell's scores saw improvement while Marathon's score held constant at 3.5. Valero slipped a bit, but nothing compared to the nearly 2 point drop that Andeavor experienced- further exacerbating the issues that can be seen in the debt section.

Efficiency

XOM

VLO

ANDV

MPC

RDS.A

Asset Turnover

.7 (5)

2.07 (1)

1.58 (3)

1.62 (2)

.79 (4)

ROE

7.89% (5)

11.33% (2)

9.47% (3)

13.81% (1)

8.93% (4)

ROIC

5.16% (5)

6.82% (2)

5.16% (5)

7.13% (1)

5.37% (3)

Employee Cost per Unit of Revenue

.173 (5)

.01 (1)

.021 (2)

.029 (3)

.0344 (4)

Sales Revenue Per Employee

3.4 million (2)

9.38 million (1)

2.69 million (4)

1.72 million (5)

3.31 million (3)

Capital Expenditure Ratio

15.39 (4)

69.46 (1)

25.98 (3)

27.58 (2)

14.64 (5)

Current Efficiency Scores

1. Valero- (1 + 2 + 2 + 1 + 1 +1 ) / 6 = 1.33

2. Marathon - (2 + 1 + 1 + 3 + 5 + 2) / 6 = 2.33

3. Andeavor- (3 + 3 + 5 + 2 + 4 + 3) / 6 = 3.33

4. Shell- (4 + 4 + 3 + 4 + 3 + 5) / 6 = 3.83

5. Exxon- (5 + 5 + 5 + 5 + 2 + 4) / 6 = 4.33

As it currently stands, Valero has a staggering advantage in its efficiency ratios relative to its competitors. Marathon holds 2nd place comfortably, followed by Andeavor and Shell. Contrary to the last two sections, Exxon finds itself at the bottom of the list as their efficiency lags behind the other four companies in this system. To see more trends, here again are last year's results:

Valero 2016 Efficiency Score- 1.5

Marathon 2016 Efficiency Score- 2.6

7Andeavor 2016 Efficiency Score- 1.83

Shell 2016 Efficiency Score- 4.83

Exxon 2016 Efficiency Score- 4.17

Both Valero and Marathon incrementally enhanced their efficiency scores, and Royal Dutch Shell gained an entire point against the rest of the companies. Exxon worked its way in the wrong direction, while Andeavor yet again took a large step backwards by dropping 1.5 points.

Growth

XOM

VLO

ANDV

MPC

RDS.A

EPS Growth

-16.1% (2)

-37.9% (4)

-69.32% (5)

-33.97% (3)

177% (1)

Revenue Growth

-1.12% (5)

7.03% (3)

21.82% (1)

4.3% (4)

15.18% (2)

Total Debt Growth

9.4% (2)

20.95% (3)

88.96% (5)

8.56% (1)

46.74% (4)

Working Capital Growth

56.7% (4)

246% (2)

107.5% (3)

253% (1)

-340% (5)

Free Cash Flow Growth

280% (2)

3.4% (4)

-77.4% (5)

86.84% (3)

300% (1)

Current Growth Scores

1. Marathon- (3 + 4 + 1 + 1 + 3) / 5 = 2.4

2. Shell- (1 + 2 + 4 + 5 + 1) / 5 = 2.6

3. Exxon- (2 + 5 + 2 + 4 + 2) / 5 = 3

4. Valero- (4 + 3 + 3 + 2 + 4) / 5 = 3.2

5. Andeavor- (5 + 1 + 5 + 3 + 5) / 5 = 3.8

Marathon appears to have the best overall growth in the past three years according to my system, being closely followed by Shell. Exxon's average score falls right in the middle of the five companies while Valero places slightly below average. To what now seems like no surprise, Andeavor's score leaves much to be desired at a poor 3.8 and captures another last place in the group of five stocks. For comparison, previous growth scores are displayed below:

Marathon 2016 Growth Score- 2.4Shell 2016 Growth Score- 4.6Exxon 2016 Growth Score- 3.8Valero 2016 Growth Score- 1.6Andeavor 2016 Growth Score- 2.6

The only two companies who improved their scores against their peers were Shell and Exxon, with the former improving 2 entire points and the latter boosting its score by .8. By staying locked in at 2.4, Marathon transitioned into 1st place, surpassing Valero who saw an uncharacteristic drop of over 1 point. To risk sounding repetitive, Andeavor saw another drop in its score to cap of its seemingly odd transformation into a laggard rather than a leader.

Now that a score has been determined for all five companies in each category, I then find a stock's cumulative score by averaging the four scores each company received. To help illustrate, the calculations are below:

1. Valero- (1.83 + 2 + 1.33 + 3.2) / 4 = 2.38

2. Marathon- (2.67 + 3.5 + 2.33 + 2.4) / 4 = 2.73

3. Shell- (2.83 + 2 + 3.83 + 2.6) / 4 = 2.82

4. Exxon- (3.33 + 2 + 2.67 + 3.8) / 4 = 3.17

5. Andeavor- (4.33 + 4.33 + 3.33 + 3.8) / 4 = 3.95

Valero, helped especially by its debt and efficiency situations, holds the top spot. In second place, Marathon put up pretty decent averages but lacked slightly in profitability. Just behind in third place is Shell, who could have potentially made a run for second place (only .09 points away) if it wasn't for their poor efficiency ratios relative to the rest of the group. Crossing into the 3's and in fourth place was Exxon, who scored tremendously in profit and efficiency, but was held back by its worse than average debt and growth numbers. Finally, way behind everyone else is Andeavor; debt and profitability scores were horrendous and efficiency and growth ratios left much to be desired. Current cumulative scores aren't the only places to draw conclusions, however, as a few trends can be seen when comparing the final scores from this year and the last.

Valero 2016 Final Score- 1.94

Marathon 2016 Final Score- 3.14

Shell 2016 Final Score- 4.11

Exxon 2016 Final Score- 3.49

Andeavor 2016 Final Score- 2.32

There's a couple key takeaways I have when comparing each year's numbers. First of all, the most startling to me is Andeavor's drop from 2nd place in last years ranking to dead last in the updated research. A year ago, Andeavor placed above average in each of the four categories and pulled in a strong score of 2.32. After revising its score with the new year's financials, Andeavor sank to a 3.95, representing a fall of nearly 2 entire points. Unfortunately, due to a takeover of the company by Marathon Petroleum, it will be impossible to see if this dramatic change in score would have been accompanied by a negative price action relative to its peers. Before news of the takeover surfaced, Andeavor rebounded to about where it began the year after a decline in the first quarter that nearly exceeded 30% at one point.

Another observation that I had was the substantial jump in Royal Dutch Shell's score. Last year, it earned last place among the 5 companies with a measly score of 4.11. This year, in contrast, it jumped up to 3rd place and yielded a score of 2.82. A lot of ground was gained for Shell against its competitors, and while this may not mean a large positive gain this year, I do believe that this improvement in score will be seen by the stock displaying elevated performance compared to the other four companies relative to its price action in the year prior.

Although less impressive than the last two transformations of scores of Andeavor and Shell, the remaining three companies did see a slight shift in their average placement. Valero still settled in at 1st place despite losing some of the huge advantage it showed in the previous year's rankings. What I like about this company is that it has stayed in first place for the last two years. It's showing an early sign of being a company that I have set out to find with the creation of this system- a stock who's fundamentals are near the top of the industry for an extended period of time- which I predict will lead to greater returns in the long run relative to its peers.

Marathon and Exxon were a little less exciting in the unveiling of their new scores. Both improved, but only Marathon was able to cross the threshold of 3 and enter the 2's- moving from 3.14 to 2.72. This, combined with the fact that Andeavor's score fell off a cliff, was enough for Marathon to move into 2nd place among the five stocks. Although its improvement from 3.49 to 3.14 was admirable, Exxon remained at a lower than average cumulative score. It's place remained at 4 for the second consecutive year, perhaps pointing to lower price appreciation than the rest of its peers for the rest of the year- was exactly what occurred last year.

Year To Date Performance

Now that the rankings and scores for each company have been presented, I'll move on to briefly showing how each stock has performed since the beginning of the year. Next to each company will be the rank it received using my model as well as the score, followed by its YTD return.

Rank Score YTD Return (%)
Valero 1 2.38 27.03%
Marathon 2 2.73 23.53%
Royal Dutch Shell 3 2.82 .71%
Exxon 4 3.14 -4.14%
Andeavor 5 3.95 20.74%

When looking at this table, please remember that Andeavor's shares are appreciated primarily due to the news of it being taken over by Marathon. Therefore, since the system is designed to correlate price action with fundamentals and not a share price premium one company is willing to pay for the other, I'll have to stop keeping track of Andeavor's share price and ignore its returns for this year. With that being taken into account, the rest of the table shows promising results. It worked out that the highest ranking stock earned the greatest return, second ranked stock got the next best return, etc. Unfortunately, I know for certain that not all the tables I publish in future articles will look like this. For one, they are just updates and the full year is not yet completed, leaving plenty of time for price action to change. Secondly, if every single stock's performance was determined by the score of my system, that would assume that all price action in the stock market is based on fundamentals. This is not the case, as speculation is abundant in today's climate, and sometimes companies with solid financials, but speculative headwinds, will under perform in the short term. In the long term, however, I think companies that stay on the top of the rankings for an extended duration will outperform the financially weaker ones.

Conclusion

As I have stated in my previous articles, I completely understand how some may write off ratio analysis as too basic and not very holistic. There are some points there, as ratios don't take into account current information or promising developments for stocks which could add value. On the other hand, ratios are useful to gain a general idea of where a company stands financially, especially among its competitors. My system is predicated on this concept, and hopefully as time passes, correlation continues to exist using my model- but there are no guarantees. I expect my future articles will a lot like this one, as I continue to update the scores of industries currently in my system as well as introducing new industries into the mix.

On another note, this model is by no means completed, nor should it be. Any feedback or suggestions are more than welcome and greatly appreciated! For example, in my introductory article, a few readers suggested that I look into weighting some of the ratios according to their importance/value within the industry. I love this idea because some ratios are able to tell more about a company than others. These weights are still a work in progress as I still am trying to figure out the most objective way to determine the value of each ratio. Opinions or guidance on how to move forward would be very helpful and would allow me to give the best value I can out of the system to readers instead of being stuck in analysis paralysis.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.