Western Refining, Inc. (NYSE:WNR) is a small, often overlooked refiner that operates primarily in the oil-soaked markets of Texas and the American Southwest. Although the company rarely attracts attention from high-flying fund managers or Wall Street analysts, it is noteworthy for several reasons. For starters, it has a solid dividend yield of 1.5 percent and recently issued a $1 special dividend that amounted to a 5 percent payout at the time. Moreover, the company’s stock price has appreciated dramatically over the past several years. Many “momentum investors” have bet heavily on Western Refining, Inc. (NYSE:WNR)’s ability to continue its strong performance.
On the other hand, this company is not without its problems. Its stock appears to have made a medium-term peak and may be locked in a downtrend. To make matters worse, a large insider sale recently attracted unwanted attention and led market-watchers to call a top in the company’s stock. Before investors hop into this seemingly undervalued company, they should take a closer look at its finances and strategic position.
Recent Price Performance
Alon, Valero Energy Corporation (NYSE:VLO) and Western Refining, Inc. (NYSE:WNR) have all appreciated by at least 100 percent over the past 18 months. This is largely the result of the underlying strength of the energy market and the broad-based rise in prices for equities over time. Since refining stocks tend to rise and fall in near-unison, it can be difficult to find patterns that differentiate individual names from one another. To make matters worse, it is difficult to say whether Western is truly undervalued. Despite outward appearances, the company’s P/E ratio of 8.5 and price-to-book ratio of 2.9 are not particularly noteworthy. For its part, Valero Energy Corporation (NYSE:VLO) has a P/E figure of 7.1 and a price-to-book ratio of 1.2. Alon has a P/E ratio of 11.4 and a price-to-book figure of 1.9.
Yield and Special Dividend
Western Refining, Inc. (NYSE:WNR) has been fairly good to its shareholders. In anticipation of changes to American tax statutes at the start of 2013, the company issued a 5 percent special dividend in December of 2012. It continues to maintain an attractive payout ratio as well. However, its less-than-ideal cash position makes wholesale dividend increases unlikely in the near future.
Western Refining vs. Other American Refiners
Western Refining, Inc. (NYSE:WNR) competes with a number of recognizable refining companies that share its geographical and strategic areas of operation. These firms include Dallas-based Alon USA Energy, Inc. (NYSE:ALJ) and San Antonio-based Valero Energy Corporation (NYSE:VLO).
Valero Energy Corporation (NYSE:VLO) is far larger than either of its lesser-known competitors. Its market capitalization of nearly $22 billion exceeds that of Western Refining by a factor of nine and dwarfs that of Alon USA Energy, Inc. (NYSE:ALJ) by a factor of 20. Meanwhile, Valero earned about $3.2 billion on revenues of over $136 billion. This compares with earnings of just $157 million on revenues of $7.8 billion for Alon and earnings of $533 million on revenues of $9.4 billion for Western. Although its profit margin is not eye-popping, Western is clearly the most profitable of these three firms. It should be noted that the refining business can be a very low-margin affair.
Unsurprisingly, all three of these companies have substantial but manageable debt loads. Alon has about $2 in debt for every $1 in cash, Western has about $3 in debt for every $1 in cash, and Valero Energy Corporation (NYSE:VLO) has about $3.50 in debt for each cash dollar on its books. All three firms have levered free cash flow figures that seem adequate to replenish their reserves.