Why Tesoro’s Valuations Are Higher Than the Historical Averages
In this part, we’ll evaluate Tesoro’s historical valuation trends. Let’s begin by looking at its price-to-earnings (or PE) multiple.
As the PE ratio considers both the market price and earnings per share, the ratio remains vulnerable to variations in both elements. Changes in equity markets can impact the stock price. A company’s revenues and costs, affected by numerous factors, can also impact its earnings per share.
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Tesoro’s (TSO) average PE ratio stood at 10.2x between 1Q15 and 1Q17. The ratio had been continuously sliding down from 1Q15 to 2Q16. However, TSO noted a reversal of the trend starting in 3Q16.
In 4Q16, Tesoro announced the acquisition of Western Refining. This seems to have resulted in a steep rise in TSO’s stock price and valuations, pushing its PE above its historical average to 13.4x in 1Q17.
Tesoro has completed the acquisition process during 2Q17. In the quarter so far, Tesoro has risen 13%. Currently, Tesoro trades at a PE ratio of 15.3x. Comparatively, Marathon Petroleum (MPC), Valero Energy (VLO), and Phillips 66 (PSX) have PE ratios of 22.8x, 14.3x, and 24.5x, respectively.
From 1Q15 to 1Q17, Tesoro’s EV-to-adjusted-EBITDA1 ratio stood at an average of 5.4x. In 1Q17, Tesoro traded at an EV-to-EBITDA of 8.2x, higher than the historical average.
TSO’s historical averages
Tesoro’s (TSO) stock price has risen despite the volatile refining environment experienced in the past few quarters. This indicates the confidence that investors may have in the company that its growth activities could result in higher earnings. Investors seem to expect Tesoro’s strategy of acquisitions and expansions to yield favorable results.
Investors could be looking for synergies and benefits from the acquisition of the Western Refining to kick in. Investors could recognize Tesoro as a downstream company that is prepared to increase its profits with any improvement in the refining environment.
For more information about Tesoro’s strategy, financial position, and growth path, please read Tesoro Completes WNR Acquisition: A Post-1Q17 Update.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩