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Despite a strong rebound this month, ConocoPhillips (NYSE: COP) stock remains cheap, according to several valuation metrics. But you need to be looking ahead, not behind, to see it. That's because valuation metrics like the price-to-sales ratio and the price-to-earnings ratio are backward-looking, using figures that have already been achieved.
Analysts are reporting that ConocoPhillips has a brighter future than past. And if you monitor the correct ratios, you may conclude that shares are a buy right now.
An encouraging valuation metric on ConocoPhillips' stock
The EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation, and amortization) ratio is a great metric to use to gauge the attractiveness of oil stocks like ConocoPhillips. That's because it adjusts for certain unique aspects of the industry like high capital intensity, debt levels, and earnings cyclicality. It has a greater focus on cash flows, giving you a more consistent understanding of the business versus profits or sales figures.
When looking at ConocoPhillips' EV/EBITDA ratio, shares don't seem overly cheap, trading at around 6 times EBITDA -- roughly in line with where shares traded at the end of 2023. But past results aren't what will matter. Future results will drive the direction of the share price. And when you dig into analyst expectations, shares look cheaper than they've been in some time.
Using analyst estimates (which admittedly could be wrong), we can calculate that ConocoPhillips' stock trades at 5.3 times forward EBITDA. So based on what analysts believe the company will earn over the year ahead, the stock is cheaper than at first glance. Of course, shares were even cheaper a few weeks ago before the rebound. But importantly, they weren't a buy until you looked at forward-looking ratios. If you had done that, you would have seen that the stock was priced near its cheapest levels since 2023.
To be clear, ConocoPhillips stock isn't the steal it was in early March. But shares are still cheaper than they first appear. And monitoring forward ratios that incorporate analyst estimates can help you identify your next buying opportunity.
Should you invest $1,000 in ConocoPhillips right now?
Before you buy stock in ConocoPhillips, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and ConocoPhillips wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.