On Wednesday, September 12, analysts at Morgan Stanley upgraded shares of Alon USA Energy, Inc. (ALJ). The firm raised its rating on the stock from an Under Weight to an Equal Weight and set a $17.00/share price target. An analyst upgrade can mean great things for a stock, but in the wake of ALJ's upgrade, I wanted to highlight some of the negative catalysts behind my decision to avoid a position in the company, and take a position in two alternatives that could certainly enhance any portfolio.
Alon USA Energy, Inc., which is based in Houston, Texas, together with its subsidiaries, engages in refining and marketing petroleum products primarily in the south central, southwestern, and western regions of the United States. The company operates in three segments: Refining and Unbranded Marketing, Asphalt, and Retail and Branded Marketing. The Refining and Unbranded Marketing segment refines crude oil into petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals, petrochemical feed stocks, asphalt, and other petroleum-based products. This segment also markets finished products and blend stocks through sales and exchanges with other oil companies, state and federal governmental entities, unbranded wholesale distributors, and various other third parties. The Asphalt segment markets several patented tire rubber modified asphalt products; and produces paving and roofing grades of asphalt, as well as manufactures performance-graded asphalts, emulsions and cutbacks. The Retail and Branded Marketing segment operates 302 owned and leased convenience store sites primarily in central and west Texas, and New Mexico. Its convenience stores offer various grades of gasoline, diesel fuel, food products, tobacco products, non-alcoholic and alcoholic beverages, and general merchandise primarily under the 7-Eleven, Alon and FINA brands. This segment markets gasoline and diesel under the Alon and FINA brand names through a network of approximately 640 locations, including the company's convenience stores; and provides credit card processing services to approximately 260 licensed locations.
Profit Margin Comparisons
In my opinion, the larger the profit margin, the more attractive the company, and the smaller the profit margin the more potential investors should be wary of establishing a position in the company. In the last 12 months, ALJ has demonstrated a profit margin of just 0.39%, which in my opinion would be one of the first signs to begin to consider an alternative option in the Oil & Gas refining sector. For example, Chevron (CVX) has demonstrated a profit margin of 11.55%, and Exxon Mobil (XOM) has demonstrated a profit margin of 10.37%, both of which were over the same 12-month period as ALJ.
By examining the numbers closer we'll notice that CVX and XOM both outpace ALJ quite significantly. CVX outpaces ALJ nearly 29.61 to 1, and XOM outpaces ALJ nearly 26.59 to 1, which in my opinion, clearly demonstrates a good enough reason to avoid ALJ at current levels.
Operating Margin Comparisons
In my opinion, the larger the operating margin, the more attractive the company, and the smaller the operating margin the more potential investors should be wary of establishing a position in the company. In the last 12 months, ALJ has demonstrated an operating margin of just 1.98%, which in my opinion, is pretty dismal and would be one of the first signs potential investors should consider when researching alternative options within the Oil & Gas refining sector. For example, Chevron has demonstrated an operating margin of 16.47%, and Exxon Mobil has demonstrated an operating margin of 11.44%, both of which were over the same 12-month period as ALJ.
By examining the numbers closer we'll notice that CVX and XOM both outpace ALJ quite significantly. CVX outpaces ALJ nearly 8.31 to 1, and XOM outpaces ALJ nearly 5.77 to 1, which in my opinion, clearly demonstrates a good enough reason to avoid ALJ at current levels.
When it comes to the Oil & Gas sector, the most attractive catalyst for many potential investors is clearly the company's yield. These yields are generally 2.00% to 4.00% and similar to the yields found in many Dow Jones Industrial Average stocks. ALJ currently carries one of the least attractive yields within the Oil & Gas sector and not only did I want to highlight that, but demonstrate how it compares with some of the more attractive yields in the sector.
In the last 12 months, ALJ has demonstrated a yield of just 1.20% ($0.16), and although the company currently has a payout ratio of 43.00%, I still think there are a few alternatives that could enhance my portfolio much than ALJ can. For example, CVX has demonstrated yield of 3.20% ($3.50), and XOM has demonstrated a yield of 2.50% ($2.28), both of which were demonstrated over the same 12-month period as ALJ. By examining the numbers closer we'll notice that the yields of CVX and XOM clearly outpace ALJ and create two very attractive options, especially for conservative income driven investors.
Potential investors looking to establish a position in the Oil & Gas sector should consider a company's profit and operating margins as well as a company's yield before deciding where and how to establish a long-term position. Based on the fundamental comparisons I've demonstrated ALJ should be avoided and positions in CVX and XOM should be considered as alternatives.