https://embed.notionlytics.com/s/UlRaVmJqUjBPSEpSVldKTlNuRlpaemxRU2pZPQ==
<aside> 💡 The following is not investment advice! Please use this in conjunction with your own due diligence before making any investment decisions.
</aside>
6.2%! Yes, you read that correctly. October inflation data came in, and CPI was up 6.2% compared to last year! The most significant contributor is energy prices which rose 30%, driven by gas prices up ~50% 🤯 . Given that gas prices are the main culprit for this increase, investing in the energy sector may be the best way to beat inflation with your investment portfolio. Let's look at some of the companies in this sector and see if any stand out based on fundamentals.
Before we dive into the fundamentals, let me give a brief overview of each of these companies. Chevron ($CVX) and Exxon ($XOM) are integrated oil and gas businesses that participate in multiple aspects of the oil production and supply chain. ConocoPhillips ($COP), EOG Resources ($EOG), and Occidental ($OXY) are part of the exploration and production stage of the oil sector. Marathon ($MPC) takes part in the refining and marketing of oil. Lastly, Schlumberger ($SLB) focuses on selling equipment and services to companies in the oil industry.
$XOM, $CVX, and $COP are the three largest companies by enterprise value, even though $MPC generates more than two times the revenue of $COP.
<aside> 💡 This is an interactive chart. Hover over the data points for more detail or click "Edit Chart" to change the metrics or chart type. You won't mess up the original, don't worry 🙂. Want to build your own charts or dashboards? Visit viz.wiijii.co. And be sure to follow @WiijiiInvest on Twitter.
</aside>
https://viz.wiijii.co/chart/?id=lMAO383iz4kWVPS1GoKK
Let's see if profit margins help explain the differences in value.
There doesn't seem to be a strong relationship between EBITDA margins and enterprise value; however, this could explain why $COP has a higher valuation than $MPC.
$COP, $OXY, and $EOG have the highest margins, and for this analysis, I am trying to find a company that can compound earnings at a high rate. Margins are an important factor in projecting this compounding effect, as they measure the efficiency of a business.
https://viz.wiijii.co/chart/?id=JZ7LyKacdH5q1W1Mj8Ir
Since $SLB, $XOM, and $MPC have the lowest margins, I will remove them from this analysis.
Now that I have removed 3 of the stocks from the comparison, I have added a dimension with the bubble size reflecting enterprise value.
Examining EV/EBITDA multiples, we can see the market is paying a premium for $COP. Investors are currently paying $11.38 for every $1 of EBITDA generated by $COP. On the flip side, $OXY is valued at only ~5x every dollar of EBITDA.
https://viz.wiijii.co/chart/?id=KonLSdLg8Z77mnNFu6sP
To further examine if there is a good reason for the difference in valuation multiples, I will compare these stocks based on trailing twelve-month earnings.
The rationale for the difference in EBITDA multiples becomes clear as $OXY has produced negative earnings over the last 12-months. It seems that poor profitability results in a discounted valuation multiple. Since I am focused on finding a profitable company to invest in, I am removing $OXY from my analysis.