Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Companies for the Defensive Investor – September 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Tesoro Corporation (TSO)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Tesoro Corporation (Tesoro), is an independent petroleum refiners and marketers in the United States. The Companyâ€™s subsidiaries, operating through two business segments: manufacture and sell transportation fuels. Its refining operating segment (refining), which operates seven refineries in the western United States, refines crude oil and other feedstocks into transportation fuels, such as gasoline, gasoline blendstocks, jet fuel and diesel fuel, as well as other products, including heavy fuel oils, liquefied petroleum gas, petroleum coke and asphalt. Its retail operating segment (retail) sells transportation fuels and convenience products In September 2013, the Company announced that it has completed the sale of all of its interests in Tesoro Hawaii, LLC to Hawaii Pacific Energy, LLC. In December 2013, Tesoro Corp closed the acquisition of the majority of the remaining Los Angeles logistics assets.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years -Â FAIL
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$57.19|
|Value Based on 0% Growth||$33.52|
|Market Implied Growth Rate||3.35%|
|Net Current Asset Value (NCAV)||-$29.57|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Tesoro Corporation is not suitableÂ for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor has concerns with the company’s low current ratio, lack of stable dividend payments, and lack of earnings stability or growth over the last ten years. Â The Enterprising Investor is similarly situated with concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability over the last five years. Â As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time. Â As for a valuation,Â the company appears to be undervaluedÂ after growingÂ its EPSmg (normalized earnings) from $0.98 in 2010 to an estimated $3.94 for 2014. Â This level of demonstrated growth outpacesÂ the market’s implied estimate of 3.35%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value aboveÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Tesoro Corporation (TSO)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Tesoro Corporation (TSO)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.