Oil prices entered an uptrend during the first half of April, overturning a declining trend for the third time during the last six months. Nonetheless, crude oil prices continue on an overall downtrend since April 2011. This reality has had different effects over industry companies. While some saw operating margins dwindle, others liquidated assets in order to sane finances. Still others have seen an irregular performance, leaving analysts wondering about growth prospects. One company that falls in the last category is Tesoro (TSO), as price targets proposed by financial institutions range from $35 to $84. In order to obtain a clearer image about the company’s future, a look at the latest news releases, financial reports and growth catalysts is necessary. That information will aid potential investors to decide whether this company is the right investment for them.
Standing in the Mist
First of all, Tesoro’s Peter Lynch earnings line has fallen below stock face price. This indicators appears to be a strong teller for a purchasing opportunity. Hence, investors should be aware a window has opened after more than three years. Moreover, the stock price has returned to 2007 levels but has been unable to continue climbing. Most important, the value seems to be stagnant at current levels alternating steep up and downs. Andreas Halvorsen (Trades, Portfolio) however, started building a strong position throughout the second half of 2013.
For fiscal year 2013, Tesoro reported interesting results. Net income reached $412 million, or $3.00 per diluted share, versus $743 million, or $5.25 per diluted share for the full year 2012. "Despite a lower margin and crude oil differential environment, and weaker earnings relative to 2012, 2013 was a year of important strategic accomplishments for Tesoro," said Greg Goff, president and CEO. The comments refer to a series of important acquisitions, drop of non-core non-performing assets, and the return of $500 million to shareholders in the form of dividends and share repurchases.
Analysts have a positive review about Tesoro, besides their confusion about target price. No financial institution has issued a report recommending to drop the stock throughout 2013. And even though there are many institutions recommending to purchase the stock, during the last quarter of 2013 and first of 2014 there is a tendency towards a neutral recommendation. Regardless, it remains clear that institutions do not have a negative opinion about the company.
The latest news for Tesoro highlights a continued environmental responsibility and shareholder recognition. First, Tesoro and Savage agreed to pay for the assessment, which would define the capabilities of emergency responders along the Columbia River near the site of the proposed terminal. Also, the company has proactively begun replacing older cars in its crude oil rail car fleet with post-October 2011 design, CPC 1232-compliant rail cars, after evaluating rail car safety features. Last, it announced the pricing of its $300 million 5.125% Senior Notes due in 2024.
Several characteristics and political developments can fuel Tesoro’s growth. First, the company is holding an important competitive advantage thanks to its size and diversity. Second, it controls 60% of the refining capacity in the supply-constrained California market, apart from improving production flexibility. Third, dividend increments display a commitment to create value for shareholders and confidence in future earnings. Fourth, continued political instability in the Middle East and North Africa led to the widening of crack spreads boosting the firm´s profitability and valuation.
Last, greater attention is being paid by Tesoro to improving business processes, reducing operating costs, enhancing the integration of the refining portfolio and investing in organic growth. Given the current small operating margin, and 30% premium carried by a stock trading at 18.7 times its trailing earnings, it is not recommended to purchase the stock for a long-term investment. Nonetheless, prospect investors should keep an eye on the stock with an eye on debt reduction.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.