One of Wall Street's biggest winners of the day is PBF Energy, a oil & gas refining & marketing company whose shares have climbed 4.9% to a price of $29.66 -- 27.11% below its average analyst target price of $40.7. The average analyst rating for the stock is buy. PBF outperformed the S&P 500 index by 6.3% as of today's afternoon session, and by 186.6% over the last year with a return of 176.2%.
PBF Energy is classified within the energy sector, which encompasses the oil, gas, nuclear, and renewable energy industries. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -- meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US energy companies is 9.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
PBF Energy's trailing 12 month P/E ratio is 2.6, based on its trailing Eps of $11.41. The company has a forward P/E ratio of 3.8 according to its forward Eps of $7.75 -- which is an estimate of what its earnings will look like in the next quarter.
Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. PBF Energy's year on year (YOY) quarterly earnings and revenues grew at a rate of 2341.1% and 104.1% respectively. Since the earnings growth rate is higher than the revenue growth rate, we can deduce that the company's profit margins are widening. Companies can increase their earnings at a faster rate than their revenue by reducing their tax liability, raising prices, or cutting their overhead or the cost of goods sold.
Unlike earnings, gross profits only take into account the company's cost of goods sold (i.e. cost of labor and materials only). The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. In PBF's case, the gross profit margins are 8.1%, which that it is operating in a highly competitive market, where it is unable to raise its prices (and thus increase its margins) without losing customers to its competitors.
The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently from their core business: the cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's levered free cash flow, which for PBF Energy is $1,794,562,560. This represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cash flow, PBF is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. PBF Energy has a P/B ratio of 1.1. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Energy sector, which stood at 1.45 as of the second quarter of 2022.
With a very low P/E ratio, a lower P/B ratio than its sector average, and strong cash flows, we can conclude that PBF Energy is undervalued at current prices. We hope this preliminary analysis will encourage you to do your own research into PBF's fundamental values -- especially their trends over time.
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