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With Sunday’s call of “gentlemen start your engines,” the summer driving season began. As is usually the case, the cost of gas at the pump rises and the beneficiaries are the refiners as well the actual owners of the pumps used to fill up your tank.

Alon USA (NYSE:ALJ) refines and markets petroleum products, and operates primarily in the South Central, Southwestern and Western regions of the United States. It owns and operates four sour and heavy crude oil refineries in Texas, California and Oregon.
Gas Pump
The combined refineries output for the first quarter of 2007 averaged 124,615 barrels per day. When you drive up to a 7-Eleven to fill up, there is a good chance that if you are in Texas or New Mexico, that it’s operated by Alon. It is the largest supplier of asphalt in California and Arizona, and the number two supplier in Texas.

It owns and operates four sour and heavy crude oil refineries in Texas, California and Oregon. The combined output of the refineries during the first quarter of 2007 averaged 124,615 barrels per day. When you drive up to a 7-Eleven to fill up, there is a good chance that if you are in Texas or New Mexico, that it’s operated by Alon. It is the largest supplier of asphalt in California and Arizona, and the number two supplier in Texas.

Speaking of asphalt, the company is experiencing higher than expected demand for it, and we have yet to hit the main summer paving season. It is running at full production for diesel products which have higher margins than its gasoline counterparts.

Jeff Morris, Alon’s President and CEO, said,

“We are pleased with the increased earnings achieved in the first quarter resulting primarily from our California refineries and related asphalt assets acquired last year. Our integration of the California refineries and asphalt business is progressing according to plan and we look forward to increasing profit contributions from these operations.”

With a PE of 12.2 versus an industry wide average of 15.5, price to sales of 0.5 versus industry average of 7.7, and with net margins a full 1% higher than the industry average, the stock is trading cheaply in relation to the competition. That being said, Alon stock has risen almost 50% since the beginning of the year, so the question that remains is, how much more upside is there?

It is important to keep in mind that over the last two summers the stock performed very well until September. More importantly, this could be used as a defensive play, if things heat up on the geopolitical front (something that is a very real possibility especially in the Middle-East) and the price of crude spikes. Just like last summer, if this were to happen the overall market would sell off, but energy plays with the likes of Alon USA could prove very fruitful.

Disclosure: Author’s fund is long ALJ as of May 28, 2007.

ALJ 1-yr chart
ALJ 1-yr chart