Going With Goldman On Marathon Petroleum

Jun.20.12 | About: Marathon Petroleum (MPC)

Goldman Sachs lifted its rating on Marathon Petroleum (NYSE:MPC) from "neutral" to "buy" today. The firm cited the company's high quality assets and growing commitment to return cash to shareholders as the main drivers for its upgrade. I have recently become more positive on the refining sector due to its low valuations and improving fundamentals. The industry should also benefit by lower oil prices. I have core positions in the space with Tesero (NYSE:TSO) and Phillips 66 (NYSE:PSX) which I received as a result of holding Conoco Phillips (NYSE:COP). Marathon also looks like a good value play here.

Five additional reasons to pick up MPC at $42 a share:

  1. Consensus earnings estimates for both FY2012 and FY2013 have both been ramped up sharply over the last three months.
  2. The stock is cheap at around 6 times trailing earnings and five times operating cash flow.
  3. In addition to Goldman's upgrade and positive comments, the stock is below the mean analysts' price target of $52. Credit Suisse has an "outperform" rating with a $60 price target on MPC.
  4. The stock has a minuscule five year projected PEG (.27) and sells for just 18% of annual revenues.
  5. The company provides a solid yield of 2.5% and I would for that to rise consistently over the next few years, give the company's payout ratio of less than 20%.

Disclosure: I am long COP, PSX, TSO.