Zacks.com Buying Opportunity for Tesoro Thursday May 8, 4:29 pm ET By Sheraz Mian
Tesoro Corporation (NYSE: TSO - News) reported weak first-quarter results, reflecting reduced product margins on the back of record feedstock costs and increased operating expenses that more than offset contribution from higher throughput levels. The company's realized margin during the quarter was down 52% from the year-earlier level as record crude oil prices and anemic product demand squeezed margins. We believe that high feedstock and operating costs will continue to weigh on near-term margins, which accounts for our negative earnings revision.
However, our long-term view of the business remains favorable, as margins appear to have bottomed and valuations have become particularly compelling. Shares of Independent refiners have been under pressure in recent days due to refining margin weakness, brought on by record feedstock costs, anemic product demand, and rising operating expenses. Despite these relatively weak near-term fundamentals, our long-term macro outlook remains favorable, particularly for the West Coast market.
Tesoro's strong leverage to this key market is particularly valuable. Valuation has become particularly compelling following the recent sell-off, which offers significant upside from current levels. Our new $40 price objective, reduced from $53 before, reflects 2008 and 2009 P/E multiples of 11.8x and 7.5x. We believe that Tesoro is better positioned than most of its peers in the current environment given the positive margin outlook for its core West Coast market in the longer term. We rate the stock a Buy.