Tesoro: Key Upgrade Should Power This Refiner

Jun. 1.12 | About: Tesoro Corporation (TSO)

The energy sector has been downright nasty over the last 6-8 weeks. One part of that sector that is holding up better than the sector overall and has dirt cheap valuations is the refiners. One stock in that space, Tesoro (NYSE:TSO) looks very undervalued and has had some recent catalysts.

Recent positives for TGX:

  • The stock was upgraded to Buy from Neutral earlier today by UBS and given a $33 price target.
  • It was also initiated by Dahlman Rose as a "Buy" in late April.
  • Consensus earnings estimates for FY2012 and FY2013 have risen over the past ninety days even in the face of falling oil prices.
  • The first insider buy in nine months was recorded in May.
  • The stock is significantly outperforming the overall Oil index in the last five trading sessions (See Chart)

Click to enlarge
(Click to enlarge)

4 reasons Tesoro is undervalued at just over $22 a share:

  • The stock is selling near the bottom of its five year valuation range based on P/E, P/B, P/S and P/CF.
  • TSO is selling at just 5.6 times forward earnings, a huge discount to its five year average (18.2).
  • The stock is extremely cheap at just 83% of book value, 7 times operating cash flow and 10% of annual revenues.
  • The stock is considerably under analysts' price targets. The median price target on TSO is $30 a share by the 11 analysts that cover the stock.

Disclosure: I am long TSO.