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HOC - is it overvalued?
- Thread starter Comptalk
- Start date
HOC appears to be the most overvalued oil refiner. Even after adjusting for its cash position and ownership of shares in HEP, HOC trades at over $20,000 per BPD refining capacity. This is nearly double the valuation of VLO and SUN.
HOC only has 2 refineries and offers little diversification in the event of a refinery fire or explosion.
However, HOC's 2 refineries are in mid-continent markets where refining margins are currently much higher than Gulf coast and east coast markets and are much higher than last year. This is the reason why HOC stock price is so high and it is one of the only refineries that is projected to have higher Q4 EPS year over year.
This is keeping HOC on the momenum screens (IBD 100) ect and giving it a higher valuation. There is alot of non-oil money momentum investors still in HOC while they have abandoned many other oil investments that have fallen off the screens.
This is keeping HOC at an 11 PE while VLO/SUN are at 7 PE's. Because of HOC's cash postion versus VLO/SUN's debt position, a premium is warranted for HOC on a PE basis, but i come up with about a 9 PE for HOC. Thus HOC appears about 20% overvalued to me relative to VLO/SUN/TSO.
Notice that FTO another midcontinent debt free refinery only has an 8.9 PE. This is where HOC should be.
Conclusion: I believe you are correct to think that HOC may be overvalued. $44 seems more inline than the current $52.
My guess is that in 6-12 months HOC will fall as it comes off the momentum screens when next years comps are much much tougher. A long VLO short HOC pair will likely do well over this time period. Less sure about the next 3-6 months.
HOC only has 2 refineries and offers little diversification in the event of a refinery fire or explosion.
However, HOC's 2 refineries are in mid-continent markets where refining margins are currently much higher than Gulf coast and east coast markets and are much higher than last year. This is the reason why HOC stock price is so high and it is one of the only refineries that is projected to have higher Q4 EPS year over year.
This is keeping HOC on the momenum screens (IBD 100) ect and giving it a higher valuation. There is alot of non-oil money momentum investors still in HOC while they have abandoned many other oil investments that have fallen off the screens.
This is keeping HOC at an 11 PE while VLO/SUN are at 7 PE's. Because of HOC's cash postion versus VLO/SUN's debt position, a premium is warranted for HOC on a PE basis, but i come up with about a 9 PE for HOC. Thus HOC appears about 20% overvalued to me relative to VLO/SUN/TSO.
Notice that FTO another midcontinent debt free refinery only has an 8.9 PE. This is where HOC should be.
Conclusion: I believe you are correct to think that HOC may be overvalued. $44 seems more inline than the current $52.
My guess is that in 6-12 months HOC will fall as it comes off the momentum screens when next years comps are much much tougher. A long VLO short HOC pair will likely do well over this time period. Less sure about the next 3-6 months.
Furthermore, should midcontinent refining margins ever fall back closer inline with Gulf Coast refining margins, EPS for HOC would fall 25-30% and HOC shares would probably be crushed. I think there has been something of a diesel shortage in HOC markets over the last 6 months which have kept HOC earnings extraordinarily high.
So what you have with HOC is a higher PE on perhaps peek margins. If margins ever fall some day, HOC PE would likely drop as momo's leave the name and it would have lower PE on lower earnings.
Timing and predicting a fall in midcontinent/mountain refining margins I have no idea about. But is the obvious risk to this name.
On a positive note, HOC has announced some expansion plans that will help earnings in 2008+. Market may be placing a premium on HOC because of more room for expansion than other refiners. Not sure.
So what you have with HOC is a higher PE on perhaps peek margins. If margins ever fall some day, HOC PE would likely drop as momo's leave the name and it would have lower PE on lower earnings.
Timing and predicting a fall in midcontinent/mountain refining margins I have no idea about. But is the obvious risk to this name.
On a positive note, HOC has announced some expansion plans that will help earnings in 2008+. Market may be placing a premium on HOC because of more room for expansion than other refiners. Not sure.
I like the long VLO short HOC idea Silk! Over time that will work out well.
5 year chart on HOC is pretty grand no IBD 100'ers there in 03, 04, 05... You have to pay up for a chart like that-- compare to VLO with a huge crater pattern.
HOC has 4 holds on the street 1 underweight and 1 sell only 2 buys average target price is $54. So I think it's safe to say HOC is fairly valued. Keep in mind that this fiscal has a wide range of opinions from $3.50 a share to $4.50.. valuation obviously will look a lot better if they come in at $4.50 or better. With the cost of creating a new refinery no matter how small you may have to figure out if HOC could be ripe for a takeover as well.
5 year chart on HOC is pretty grand no IBD 100'ers there in 03, 04, 05... You have to pay up for a chart like that-- compare to VLO with a huge crater pattern.
HOC has 4 holds on the street 1 underweight and 1 sell only 2 buys average target price is $54. So I think it's safe to say HOC is fairly valued. Keep in mind that this fiscal has a wide range of opinions from $3.50 a share to $4.50.. valuation obviously will look a lot better if they come in at $4.50 or better. With the cost of creating a new refinery no matter how small you may have to figure out if HOC could be ripe for a takeover as well.
Good responses on fundamentals. Wouldn't be a buyer right now either for HOC. Technically, I'd look at it if hits 56.00. If volume is strong and it blows thru 56.00, I'd buy it as swing trade. If it stalls at or slightly below 56 with average volume, and starts dropping, I'd short it with 56 being resistance and 38 support.