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ConocoPhillips' Management Is Creating Value

By Dan Dzombak - Updated Apr 6, 2017 at 9:51PM

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What EVA momentum shows us about the folks running ConocoPhillips.

"I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it," Warren Buffett's business partner, Charlie Munger, once said. "And never a year passes but I get some surprise that pushes my limit a little farther."

For corporate boards, using bad incentives for management pay can be disastrous. (Think Lehman Brothers.) Incentives based on singular metrics such as revenue growth, EBITDA, return on equity, or earnings per share are easily manipulated and gamed. Fortunately, EVA momentum provides a better alternative.

Creator Bennett Stewart of EVA Dimensions, who also co-created EVA (Economic Value Added), calls EVA momentum "the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

So what does this mean for investors? A positive reading on EVA momentum means a company has created value by increasing its EVA, and a negative EVA momentum means EVA has decreased and less value is being created. EVA momentum is one of the few performance measurements, if not the only one, with such a clear dividing line between good and bad performance.

The best companies, then, create value in excess of their cost of capital, as reflected by positive EVA momentum. The higher the EVA momentum, the faster management is creating value.

Let's look at ConocoPhillips (NYSE: COP) and three of its peers to see how effectively they create value. Here are the trailing four quarters' worth of EVA momentum figures for each company over the past three years, along with rankings by percentile versus the Russell 3000 for the past 12 months' EVA momentum.

Company

2009 Q1 TFQ

2010 Q1 TFQ

2011 Q1 TFQ

Russell 3000 Percentile

ConocoPhillips (2.1%) (3.7%) 2.9% 66
Chevron (NYSE: CVX) 0.6% (3.8%) 4.4% 76
Marathon Oil (NYSE: MRO) 0.1% (3.4%) 2.8% 65
Exxon Mobil   (NYSE: XOM) (0.9%) (4.9%) 3.2% 69

Source: EVA Dimensions LLC. TFQ = Trailing Four Quarters.

With an EVA momentum of 2.9%, ConocoPhillips' economic value added increased year over year, placing it in the 66th percentile of all companies in the Russell 3000. All of the three remaining companies had positive EVA momentum over the past 12 months.

Businesses with high EVA momentum are effectively creating value. It will be interesting to see how useful this extremely new metric proves to be for companies and investors. If it lives up to its promise, it will be an essential tool in investors' arsenals.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$59.84 (-2.84%) $-1.75
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$112.87 (-1.72%) $-1.98
ConocoPhillips Stock Quote
ConocoPhillips
COP
$70.13 (-2.80%) $-2.02
Marathon Oil Corporation Stock Quote
Marathon Oil Corporation
MRO
$15.49 (-2.27%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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