ConocoPhillips Undervalued Given Soaring Oil Prices

7/3 - "With oil dictating everything in this market, I can’t understand why ConocoPhillips (COP) is trading at 7 times next year’s earnings.

It’s not like the earnings estimates are falling. 90 days ago, analysts expected the company to earn $10.43 a share this year and $10.59 next year. Today, the estimates are $12.41 and $13.44, respectively. The consensus five-year growth rate is just 1%, which would mean a drop back to $7.65 a share within five years. I just don’t see that happening, so there should be potential upside surprise to the growth estimates as well."

"Over the last 12 months, the company’s free cash flow (cash flow from operating activities less capital expenditures) was $12 billion. Cash from operations has been growing steadily, suggesting that the free cash flow may improve further. With Conoco’s $145 billion market capitalization, that amounts to a free cash flow yield of 8.3%. The 500-basis-point premium over Treasuries is a pretty attractive risk premium, even if the cash flow doesn’t grow."

"I think Conoco’s growth rate will be more like 4% or 5% annually over the next five years, and that its price-to-book could expand to at least 2.0 times over the same time frame. By my calculations, that scenario would result in an average annual total return of 17% to 20% a year."