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Tesoro: Value Stock or Value Trap?
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The first stat that jumps out for Tesoro is the P/E ratio; 6.3 trailing and 5.5 on forward projections. Add a price-to-book of 1.2 and this starts looking like a classic value investor's target. Tesoro's closest competitor is probably Valero (VLO) and based on just a quick look at the numbers, there isn't a lot of difference in the valuation for the two companies. The problem is the crack spread, the difference between crude prices and refined product prices, is very tight. Even though we've got high gasoline prices, refiners are paying record high prices for crude oil and crude is by far their largest expense. With the US economy weak, refiners will continue to have trouble raising prices and as long as the demand around the world for crude keeps prices up, refiners will have a tough time making much money. Add political pressure on oil companies over gasoline prices and it's tough to make a case for product prices rising faster than crude. In order to be bullish on refiners, you need to believe that either refined product prices are going to climb faster than crude prices or that crude prices will fall and gasoline prices will stay high. I don't see an economic scenario that supports either of those outcomes. For an investor with a long time horizon, it might not be a bad time to start building a position in TSO or VLO on the theory that some day the crack spread will widen. TSO is setting new 52-week lows as I type this and it's hard to imagine there's much downside left (I've discovered that's a very dangerous assumption). But, I think you have a long dead money wait. And, with a dividend yield of 1.5%, you don't get paid much to wait. I'm not smart enough to know which part of the energy business will be hot over the next several months, so I would much rather own an integrated oil company like Chevron or ExxonMobil than a pure play refiner. With big profits from their upstream operations, the big integrated companies can afford to operate their downstream ops at very low crack spreads and put lots of pressure on refiners. They won't have as much upside when the crack spreads widen again, but they'll do better while you're waiting. Disclosure: I own Chevron in SLO and real life, but don't have a position in any other companies mentioned in this entry at time of posting. | ||
