Is Marathon Petroleum Corporation (MPC) a Good Stock to Buy?

Marathon Petroleum Corp (NYSE:MPC) is America’s fourth largest refiner with crude oil refining capacity of approximately 1.8 million barrels per calendar day. MPC also owns Speedway, America’s second-largest convenience store chain, and a direct or indirect stake in 8,300 miles of crude and light product pipelines, as well as more than 5,000 miles of gas gathering pipelines. The company was spun off from Marathon Oil Corporation in 2011. The stock has almost doubled since it started trading.

Because annual crack spreads between WTI inputs and gasoline/distillate outputs widened from 2011 to 2015, Marathon Petroleum Corp (NYSE:MPC) has experienced robust earnings growth. MPC’s EPS increased from $3.34 in 2011 to $5.26 in 2015 and MPC’s annual dividend rose every year going from $0.225 per share to $1.14 in the same time frame. MPC now pays a dividend of $0.32 per share every quarter, good for a 3.5% yield.

Due to abnormally low crack spreads in the first three months of the year, Marathon Petroleum reported first-quarter GAAP earnings of less than one cent per diluted share, compared to $1.62 per diluted share in the first quarter of 2015. When adjusting for pretax charges related to impairment of goodwill and the adjustment of inventories, the company earned $0.07 per share, less than half of the consensus estimate of $0.15 per share. Revenues were $12.83 billion, down 25.6% year-over-year. Although Marathon Petroleum’s quarter was bad, the good news is that crack spreads strengthened in the latter half of the quarter as gasoline inventories declined and as refiners adjusted to market conditions. Due to the improving crack spread, analysts still expect Marathon Petroleum to earn $3.71 per share for 2016, more than enough to cover the company’s dividend cost of $1.28 per share for 2016. Marathon’s midstream unit has also benefited from the 70% surge in WTI prices since February.

In the long run, Marathon Petroleum Corp (NYSE:MPC) remains attractive given its cheap valuation (8x forward PE), its advantage against international refiners due to low domestic natural gas prices that lower feedstock and energy costs, and its diversified operations. With a 2016 estimated payout ratio of 0.35, MPC’s dividend is safe as long as crack spreads normalize.

Having said this, let’s take a look how smart money investors have been trading shares of Marathon Petroleum Corporation. Overall, a total of 42 funds among those tracked by Insider Monkey held around $1.48 billion worth of the company’s stock at the end of March, down from 50 funds having amassed $2.58 billion worth of shares a quarter earlier. In this way, these funds held 7.50% of Marathon Petroleum Corp (NYSE:MPC)’s outstanding stock. The largest stakes were held by Cliff Asness‘ AQR Capital Management and Dmitry Balyasny‘s Balyasny Asset Management, which reported ownership of 7.13 million shares and 4.27 million shares, respectively, in their last 13F filings.

Disclosure: none