uploads///Historic Valuations

Tesoro’s Valuation Trend: Trading Lower Than Historical Averages

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May. 25 2016, Updated 1:05 a.m. ET

Tesoro’s valuation is trending lower

Tesoro (TSO) has traded at an average PE (price-to-earnings) ratio of 11.2x from 1Q14 to 1Q16. PE ratio measures the company’s price per share as a multiple of earnings per share.

Since PE ratio considers both the market price and earnings per share, the ratio remains vulnerable to changes in both parameters. The stock price is subject to volatility in equity markets. On the other hand, earnings per share is driven by revenues and costs affected by numerous factors.

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Tesoro’s PE ratio has experienced this volatility over the past two years. Favorable refining margins have led to a rise in earnings from its refining segment. Amid fluctuations, TSO’s PE ratio fell from 15.4x in 1Q14 to 7.0x in 1Q16. Currently, Tesoro trades at a PE of 6.3x, which is lower than its historical average.

Tesoro’s EV-to-EBITDA and price-to-cash-flow ratios

From 1Q14 to 1Q16, TSO’s EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) and price-to-cash-flow ratios stood at an average of 6.1x and 7.1x, respectively. These two ratios are subject to market fluctuations and company performance. EV is broadly market capitalization plus debt minus cash. It reflects the theoretical purchase value of the entire company.

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In 1Q14, the price-to-cash-flow ratio stood at 14.6x, its highest level. In 2Q14, EV-to-EBITDA stood at 7.6x. Both ratios fell from 2Q14 to 3Q15, as the rise in earnings was steeper than the rise in stock price. But in the past couple of quarters, the stock price and earnings have both fallen. EV-to-EBITDA and price-to-cash-flow ratios were 4.7x and 4.3x, respectively, in 1Q16.

Currently, Tesoro is trading at 4.4x EV-to-EBITDA and 3.9x price-to-cash-flow, which are lower than their historical averages. Delek US Holdings (DK), Northern Tier Energy (NTI), and PBF Energy (PBF) are trading at EV-to-EBITDA of 7.9x, 7.3x, and 10.5x, respectively. The iShares US Oil & Gas Exploration & Production ETF (IEO) has ~22% exposure to the refining sector stocks.

Why is Tesoro trading at lower valuations?

Tesoro is trading at valuations below historical averages since its stock price has fallen steeply compared to the fall in its earnings and cash flows. Although TSO is on a growth trajectory, the fall in its cash coupled with a rise in its debt is likely weighing on the stock.

Next, let’s look at Tesoro’s forward valuations compared to its peers.

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