Zacks energy sector analyst Sheraz A. Mian has maintained his Buy rating for oil refining company Tesoro Corporation (TSO) despite lowering EPS estimates. Here are some of the reasons why:
'While we are maintaining our Buy recommendation on Tesoro shares ahead of the company's third quarter results on November 1, 2007, we have lowered our estimates. A combination of seasonal margin pullback and reduced realizations due to high feedstock costs and lower yields are behind our negative earnings revision.
'Our new 2007 and 2008 EPS estimates are $6.85 and $7.12, down from $8.18 and $7.93, respectively. While we have adjusted our price objective lower, inline with our reduced estimates, we continue to like Tesoro's strong leverage to the attractive West Coast market. Shares of Independent refiners have been under pressure in recent days due to refining margin weakness. In addition to the expected seasonal pullback in margins (margins typically drop significantly following the summer months), another factor impacting realizations has been high feedstock costs due to peak crude oil prices.
'These factors were particularly pronounced in the case of Tesoro because of the West Coast's weaker fundamentals relative to other regional markets. While we have lowered our estimates and price objective ($62 vs. $68), our overall positive view of Tesoro remains unchanged. Despite the recent weakness, we consider the West Coast to be an attractive market. We have reduced our price objective to $62 from $68 earlier, which we determine using a 2008 P/E multiple of 8.7x. We believe that Tesoro is better positioned than most of its peers in the current environment given the positive margin outlook for its core West Cost market in the longer term.'
Read the full analyst report on TSO.
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