David Tepper's Low-P/E Stocks: VLO, TSO, HFC, UAL, BP
Tepper got involved in the financial arena when he was young and saw his father trade stocks in his hometown of Pittsburgh. Later on, he earned a master degree in industrial administration from Carnegie Mellon in 1992. Tepper gained an excellent reputation as a distressed-debt specialist. He has obtained the highest earnings investing during crises, bankruptcies and other disasters.
Most importantly for the 18 years he has managed the firm, he has been able to accurately time investments and markets. He has the ability to buy and sell positions in the exact moment. Actually since the setting up of the fund, he has made a 29.2% average annual return.
In 2010, he was interviewed by CNBC. During the interview, he stated that investing during hard times was easy and when he was asked about him and his company, he added: “We’re, for better or worse, we’re a herd leader, ok? We’re at the front of the back. We’re one of the first movers. First movers are interesting. You get to the good grass first, or sometimes the lion eats you.”
Here are some of Tepper’s low-P/E stocks:
Valero Energy Corporation (VLO): VLO is a North America's independent petroleum refiner and marketer operating in the United States, Canada and Aruba. They mainly produce conventional gasoline, distillates, jet fuel, asphalt, petrochemicals, lubricants and other refined products.
David Tepper decided to invest in this stock because although the company is trading low, at $19.85 and it has been ranging between $16.40 and $31.12 in a term of 52 weeks, there are other figures that show that the company will definitely raise its prices and improve. Actually the company has a market cap of $11.1 billion, TTM P/E ratio is 5.2, and forward P/E ratio is 5.1. P/B, P/S, and P/CF ratios stand at 0.7, 0.1, and 2.4, respectively. Operating margin is 3.4%, and net profit margin is 1.4%. Most importantly, it does not have any significant debt issues.
In terms of dividends, it can be said that the company is shareholder friendly. It has increased dividend payout 3 times in the last quarter. According to the latest dividend of $0.15, projected yield is $2.9%.
Regarding future expectations, Wall Street has diverse opinions on the company. Both the growth estimate and the bottom line growth estimate are negative: -7.2% and -36.7%, respectively for next year. Average five-year annualized growth forecast estimate is 13.2%. However, many other Wall Street analysts have issued a positive opinion about Valero. It is considered that the growth estimate will be at 6.6%.
Generally speaking, Valero is trading below its peers with a trailing P/E ratio of 5.2 given the reduction in the value of refinery stocks across the industry. The global crisis has severely affected the company.
Fortunately, Valero has shown improvements being able to boost its yield by 200%.
Tesoro Corporation (TSO): TSO is an independent petroleum refiner and marketer in the United States. It is divided into two business segments: manufacture and sell transportation fuels. Through these segments, the company refines crude oil and other feedstocks into transportation fuels and sells transportation fuels and convenience products in 15 states states through a network of 880 retail stations, under the Tesoro, Shell, USA Gasoline and Mirastar brands.
In 2011, Tesoro reported manufacturing costs over $7 per barrel for its plant in California although the company reported $4 in the remaining facilities and was trading for $23.6, nearly equal to its book value per share of $23.16. However, the company has a significant off-balance-sheet asset able to create value opportunity. The LIFO reserve has undergone a remarkable growth in the last ten years. This growth can be attributed to the company’s general growth and the increasing price in petroleum products. Taking into account the size of the company, that of the off-balance-sheet-asset represents a significant value. The current (1Q 2011) value of the company’s LIFO reserve is approximately $1.9B, or $13.22/share. This can be translated into a 57% increase in share price. Should such reserve be considered, the company would be able to significantly increase. TSO is trading at an important discount vis-à-vis its adjusted book value.
Tesoro Corporation has recently decided to spin off its logistics operations, which should provide the company with about $24.5m per year.
It is clearly shown why David Tepper invested in TSO. He could envision that this company is financially strong and has ample room for expansion.
HollyFrontier Corporation (HFC): HFC is an independent petroleum refiner that produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. It operates through two segments: Refining and Holly Energy Partners LP (HEP). In 2010, it owned and operated three refineries, Artesia in New Mexico, Lovington in New Mexico and Tulsa. In July 2011, it merged with Frontier Oil Corporation. On Nov. 9, 2011, Holly Energy Partners LP and Holly Corporation acquired certain pipeline, tankage, loading rack and crude receiving assets of HollyFrontier Corporation.
Tepper chose HFC because it has great opportunities to continue growing. Indeed, it reinvested more than $500 million to increase growth and feedstock flexibility. It recently purchased Tulsa refinery which will improve the business. Most importantly, it has always outperformed its peers in terms of return on invested capital and return on assets. Holly has always reported high profitability and has always shown flexibility to change with the market. It has a stable cash flow and has been able to increase EBITDA. While in 2008, its capacity was 111 bpsd, in 2009 it increased it to 256 bpsd. The addition of the Tulsa Sunoco refinery added +85 bpsd, and the Sinclair refinery another +40 bpsd.
In terms of figures, gross margins improved from $7.21 to $9.10 and Holly has achieved the highest ROIC among its peers. Its balance sheet is strong; it has flexibility and conservative debt levels. It reported cash at $272 million, a $400 million credit facility and $300 million in senior unsecured notes.
United Continental Holdings Inc. (UAL): UAL is a holding company with world wide known subsidiaries: United Air Lines Inc. (United) and Continental Airlines Inc.
In 2010, JT Merger Sub Inc. merged with and into Continental, with Continental surviving as a wholly owned subsidiary of UAL Corporation. Passengers load is increasing. In October, indeed, it posted a 10% increase in PRASM despite having a load factor of 82.0%, down by 1.5% from the previous year.
Analysts expect for EPS to reach $2.08 on revenue of $10.14b. The consensus range is wide at $1.90-$2.17 for EPS, and $10.03B-$10.20B.
Although results were not as expected, they fell 0.1%, 2.7%, and 1.7%, from July to September, David Tepper picked this stock. He is confident that the company despite the several upgrades and downgrades it suffered during the quarter will certainly improved. Analysts have rated it as a good opportunity. Most importantly falling prices in fuel will help the company to move forward.
BP Plc (BP): BP is an international oil and gas company with presence in 80 countries. It provides fuel for transportation, energy for heat and light, retail services and petrochemicals products.
The company operates two segments: Exploration and Production, and Refining and Marketing.
Financially speaking, BP is in sound health. Its stock is trading at $43.41 per share. It has EPS of 7.32, P/E of 5.90, and a Dividend Rate of 1.68 representing a yield of 3.87. Its market cap is currently valued around 137 billion. This consistent uptrend is remarkable and shows the stock price is not following the tendency of other stocks.
For the future, BP expects to double investments in exploration, deep water operations and giant fields, among others. BP supports investments that are in line with its capabilities and experience. It will also continue to develop its competitively strong downstream businesses. It has launched a divesting program of $30 billion which will be extended to $45 billion and by 2013 it will divest further $15 billion.
For the nine months to September BP reported profits of $15.9 billion, or 0.84 GBP for ordinary share and $5.06 per U.S.-listed ADS. During that same period it posted a loss of $-3.04 due to Macondo spill. David Tepper put an eye on this stock because its pricing makes it a suitable pick especially for someone like him who looks for discounted prices in long positions. Of course, this stock is also suitable for short-term players who would like to see if BP can surpass existing levels.