• If you are wondering whether Marathon Petroleum's current share price lines up with its underlying value, you are not alone. This article takes that question head on.
• The stock recently closed at US$187.58, with returns of 9.2% over 7 days, 13.6% over 30 days, 13.6% year to date, 22.2% over 1 year, 63.8% over 3 years and a very large gain over 5 years.
• Recent coverage of Marathon Petroleum has focused on how investors are reassessing large US refiners and fuel suppliers, paying close attention to capital allocation, refinery operations and product demand trends. This context helps frame why the stock's recent moves have caught the market's eye.
• On our checklist, Marathon Petroleum scores a 4 out of 6 valuation score. We will unpack this using several common valuation approaches next, then finish by looking at a more rounded way to think about what the stock might be worth.

Approach 1: Marathon Petroleum Discounted Cash Flow (DCF) Analysis

A DCF model takes estimates of the cash a business could generate in the future, then discounts those cash flows back into today’s dollars to arrive at an estimate of what the whole company might be worth now.

For Marathon Petroleum, the latest twelve month Free Cash Flow is about $5.07b. Analyst estimates and Simply Wall St’s extrapolations project Free Cash Flow reaching about $7.48b in 2035, using a 2 Stage Free Cash Flow to Equity model that tapers growth over time. Each of those future cash flows is discounted back to today, then combined with a terminal value to get a total equity value per share.

This model produces an estimated intrinsic value of about $466.78 per share, compared with the recent share price of $187.58. On this basis, the stock screens as about 59.8% below the DCF estimate. This indicates a wide gap between price and this particular cash flow based valuation.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Marathon Petroleum is undervalued by 59.8%. Track this in your watchlist or portfolio, or discover 878 more undervalued stocks based on cash flows.

Approach 2: Marathon Petroleum Price vs Earnings

For a profitable company like Marathon Petroleum, the P/E ratio is a useful way to think about what you are paying for each dollar of earnings. Investors typically accept a higher P/E when they expect stronger growth or see lower risk, and look for a lower P/E when growth expectations are more muted or there is more uncertainty.

Marathon Petroleum currently trades on a P/E of 19.59x. That sits above the Oil and Gas industry average of 13.54x, but below the peer group average of 29.38x. These simple comparisons give a first pass sense of how the market is pricing the stock relative to both its sector and similar companies.

Simply Wall St’s Fair Ratio of 23.30x is a proprietary estimate of what a “normal” P/E might look like for Marathon Petroleum, given factors such as its earnings profile, industry, profit margins, market capitalization and company specific risks. Because it adjusts for these elements, the Fair Ratio can be a more tailored benchmark than a broad industry or peer average. With the Fair Ratio above the current P/E, this framework indicates that the shares currently screen as undervalued on earnings.

Result: UNDERVALUED

P/E ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1425 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Marathon Petroleum Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, which let you attach a clear story to your numbers by linking your view on Marathon Petroleum’s future revenue, earnings and margins to a financial forecast and then to your own fair value estimate.

On Simply Wall St’s Community page, millions of investors use Narratives as a simple tool where they can set assumptions, see the fair value that results from those forecasts, and then compare that fair value to the current share price to help decide whether the stock looks attractive, fairly priced or expensive for their goals.

Because Narratives are refreshed when new information arrives, such as Marathon Petroleum’s earnings releases or major news, your view does not stay static. You can quickly see how updated assumptions change the gap between fair value and price.

For example, one Marathon Petroleum Narrative might assume a higher long term profit margin and assign a higher fair value, while another assumes more cautious margins and a lower fair value. Both investors can clearly see how their different stories translate into different numbers.

Do you think there's more to the story for Marathon Petroleum? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.