130 The Business of Value Investingoffers the greater value. Yet based on some very sound metrics of
profi tability noted in the table, ConocoPhillips appears to offer the
greater value at the current given price. The value is not only evident
in potential price appreciation; of more importance to value inves-
tors, value is evident in the form of capital preservation. Over the past
three years, ConocoPhillips has delivered a free cash fl ow return of
greater than 10 percent based on today ’ s current price level while
Cabot ’ s increasing capital expenditures have exceeded cash fl ow
from operations. Cabot is a fi ne oil company, but when examining
the price paid versus value received, at current prices , ConocoPhillips
seems to offer investors the better bang for their buck. Also missing
from Table 7.1 is the dividend yield: Currently ConocoPhillips pays
investors an outstanding 3.7 percent annual dividend while Cabot
pays 0.40 percent. Clearly investors have further benefi ted from
free cash fl ow generated by Conoco over the years.
The greatest error to which investors fall prey is relating the
price level of a security with the anticipated future value to be
received. The common mode of thought is this: A security trad-
ing at $ 2 a share can easily get to $ 4 whereas a company like
ConocoPhillips will have a far harder time getting to $ 104 from $ 52.Table 7.1 Finding Value(^) ConocoPhillips Cabot Oil and Gas
P/E ratio 4.3 12.7
P/B ratio 0.83 1.64
Return on equity 21.29% 15.4%
Market value ( $ B) $ 78 $ 2.76
Free cash flow (3 - year avg.) $ 8 billion – $ 80 million
Free cash flow yield (3 - year avg.) ~ 10% n/a
The numbers reflect December 2008 figures.
Source: Yahoo! Finance and Securities and Exchange filings.
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