The balance sheet looks healthy, like Valero’s, with over $2 billion in cash and a low debt-to-equity ratio of 0.2117. Net income for the trailing twelve months is $1.6 billion, off around $19 billion in revenue ttm. Comparing Valero’s $2 billion net income ttm to its $134 million revenue ttm would suggest that HFC has been enjoying larger margins, 11.5% net, for a while. HFC seems to have been doing better and a significant margin surprise might not occur.
It could be worth a shot to buy the stock into earnings. You could also try to find some cheap calls, but that is probably unlikely considering the focus on the sector now. Expectations of a rise probably demands a higher premium. Simply buying the stock would be the only realistic option. Valero was a “surprise,” so you are at best making an assumption of the same event based on being in the same industry. I will say that refiners are expected to continue their rise, so that suggests going long is a solid decision, but assumptions are never guaranteed to hold true.
At a market cap of $10 billion, HFC is one of the smaller companies. Marathon Petroleum Corp (NYSE:MPC), on the other hand, is a $25 billion company. Net margins are at 5.75%, and if HFC is a guide there is some room for improvement there. Marathon is another company that has already been seeing benefits from the cheaper crude. If you peruse the internet some, yes peruse, you will see that both HFC and MPC have been cited as benefiting from the cheaper crude. MPC is up 98% in the last year, maybe more once this article appears. These companies are benefiting from a positive macro environment that is likely to continue, but upside might be limited since it has already risen so much.
MPC’s operations are more easterly than HFC’s, but are still located appropriately to benefit from Canadian and Midwest crude. Marathon reported solid earnings as I write this last paragraph, but I am more interested in the long-term trajectory of the company, which is governed by the macro environment. MPC is a lot bigger than HFC, and for that reason I would go for HFC. Expansion is the key, and HFC has the room to grow. I think that on a percentage basis HFC will see greater gains from expansion, and it has a PE of 6.5, which means there is no reason to wait for the price to subside after a Valero-fueled lift all boats event. Look for HFC to have a P/E of 9 with increasing earnings.
The article Valero Beat Continues Momentum for Industry originally appeared on Fool.com and is written by Nihar Patel.
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