- PBF Energy Inc. is attractively valued on both a "normalized" basis and a "current" basis.
- The company has been a strong financial performer for years.
- By selling put options, you can take ownership of PBF Energy stock at a 28% discount or earn a 13.6% annualized yield.
Right now, PBF Energy Inc. (NYSE:PBF) offers investors a unique value proposition based on its track record of success, as well as its attractive valuation profile. With a long history of turning revenues into profits, in addition to a great entry point multiple (at 1.3x Free Cash Flow!), we think the time is now to begin building a position. For investors seeking to capitalize on this opportunity, a short put strategy presents the most attractive way to get involved. By selling put options on PBF, investors can generate income while mitigating risk, all while potentially acquiring a stake in a company with a solid financial foundation at a steep discount.
Before diving into the trade, let's take a look at PBF’s recent financial results. Over the last twelve months, the company took in ~$47 Billion dollars in Revenue, and managed to hold on to $4.2 Billion in Free Cash Flow. That’s a solid ~9% cash flow margin.
Even more impressive - these results follow a prior period that only saw ~$27 Billion in Revenue, and $228 Million in Free Cash Flow ("FCF"):
This remarkable growth can be attributed to the continued surge in energy markets over the last year as a result of the war in Ukraine and other supply chain snarls. Clearly, higher energy prices and reduced competition is better for PBF’s bottom line.
However, even if you extend your view past the recent oil boom, PBF’s results have been robust. In the 4 years prior to the energy market shakeups in 2020, PBF averaged $22.3 Billion in Revenue, and $442 Million in Free Cash Flow. While these results are less impressive than the most recent twelve-month period in both nominal amount and FCF margin percentage, it proves that PBF can navigate and survive even the most lackluster markets while also capitalizing on spectacular ones.
From a financial health perspective, PBF is in good shape. The company’s total assets far outweigh its liabilities, and book value sits just above $5B. Additionally, PBF’s liquidity is robust, with a $2.2 Billion cash position that stands taller than all combined short-term liabilities which total just shy of $1.7B. It doesn’t appear that any crisis or cash crunch is in the cards, at least for the foreseeable future.
Operating results have been strong, but the valuation is where things get interesting. In short, right now is a great time to enter the story, as both "current" and "normalized" multiples seem wildly attractive and provide a large margin of error.
From a current perspective, the numbers are so "good" that they border on being meaningless. Over the last twelve months, PBF produced $4.2 Billion in Free Cash Flow. As a reminder, the total market cap of the company sits at $5.4 Billion, which results in an astounding 1.3x FCF multiple. Clearly, this is not sustainable, and the market is pricing in some mean reversion in operating results.
However, even if results come back down to historical norms in short order, PBF still looks attractive. Using the pre-2020 data we mentioned before, if you calculate a "normalized" FCF multiple, you’ll still end up with 12.2x, which is highly historically attractive.
Off of revenue, PBF is also cheap as well. In the 4 years before 2020, PBF’s price to sales valuation ranged between 0.13x revenue and 0.27x revenue. Currently, it’s trading at 0.12x.
By any metric, the market is mispricing PBF Energy Inc. - both historically, and on the underlying operations.
Now that we’ve discussed the what and the why, let’s take a look at the how.
Sure, interested investors could purchase PBF Energy Inc. stock as an investment and go on with their day. However, we think there is an even more attractive way to approach this setup: selling put options on PBF stock. For those unfamiliar with this type of transaction, read on for some basics so you’re not lost.
In essence, selling a put involves selling an option that states that you will be willing to buy shares of stock, should the stock drop below a certain price - the Strike Price - before a certain date - the expiration date.
As the seller of the put option, you receive a cash payment premium for undertaking the obligation to be a willing buyer at the strike price. In other words, when you sell a put, you’re selling “insurance” on the stock.
For our trade, we like the June 16th, $31 strike put options. Given that the stock is trading at ~$42 per share as of writing, the option premium of $0.75 per share would yield a 2.48% return on the invested capital over the next 66 days. This annualizes to approximately 13.6%. Not bad!
As a result, put sellers would either get to keep the $0.75 per share as a reward for selling the options, or they would be required to purchase the stock at $31 per share, a 28% discount from current prices. In this way, selling put options on PBF allows you to generate income and mitigate risk while potentially acquiring the stock at a lower price if the option is exercised. Which, to us, seems like the best way to structure a trade around this setup.
While the trade idea presents potential rewards, there are some risks to consider as well.
Macro Risk: While PBF Energy Inc. does a good job of controlling its own operations, there’s less control that it has over interest rates and government policy. It’s possible that government regulations could come down harder on the politically unpopular legacy energy industry, which may hurt potential profits or increase compliance costs.
Commodity Risk: As PBF is an oil refining company, their profit margin is somewhat determined by the prices of the raw products they take in (crude oil), and the refined products they put out (Gasoline, Heating Oil, etc.). All of these markets are highly liquid and exchange-traded, and thus unfavorable spreads could hurt margins or even cause losses.
Technical Risk: On the weekly timeframe, some may argue that PBF stock is overbought, according to a number of different technical indicators. We think there is room to continue higher, but it’s possible that a technical correction (sentiment based) may strike and cost investors some losses.
In conclusion, options seem like the best way to capitalize on PBF Energy Inc.'s attractive valuation and stable financial performance. By selling put options on PBF, investors can generate income, mitigate risk, and potentially acquire the stock at a lower price if the option is exercised.
With a -28% breakeven point on PBF Energy Inc. shares, or an 88% chance of a 13.6% annualized return, it’s hard to argue it's not a win-win trade.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in PBF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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