How Expensive Is Western Refining Stock Right Now?

Numbers can lie -- but they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

• The current price multiples.
• The consistency of past earnings and cash flow.
• How much growth we can expect.

Let's see what those numbers can tell us about how cheap Western Refining (NYSE: WNR  ) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then, we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow. This divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). Like the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Western Refining has a negative P/E and EV/FCF ratios over the trailing 12 months. If we stretch and compare current valuations to the five-year averages for earnings and free cash flow, Western Refining has a P/E ratio of 7.7 and a five-year EV/FCF ratio of 30.6.

A one-year ratio under 10 for both metrics is ideal. For a five-year metric, under 20 is ideal.

Western Refining has a mixed performance in hitting the ideal targets, but let's see how it compares against some competitors and industry mates. 

Company	1-Year P/E	1-Year EV/FCF	5-Year P/E	5-Year EV/FCF
Western Refining	NM	NM	7.7	30.6
Valero Energy (NYSE: VLO  )	NM	21.3	4.6	7.3
Sunoco (NYSE: SUN  )	NM	6.6	7.2	13.0
ConocoPhillips (NYSE: COP  )	8.6	18.1	14.0	16.2

Source: Capital IQ, a division of Standard & Poor's.

Numerically, we've seen how cheap Western Refining is on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash flow generation.

In the past five years, Western Refining's net income margin has ranged from -2.0% to 7.4%. In that same time frame, unlevered free cash flow margin has ranged from -3.2% to 5.9%.

How do those figures compare with those of the company's peers? See for yourself:

Source: Capital IQ, a division of Standard & Poor's; ranges are combined.

Additionally, over the last five years, Western Refining has tallied up two years of positive earnings and three years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Five-year analyst growth estimates tend to be comically overstated. If you accept them at face value, you will overpay for stocks. But while you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared to similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Western Refining's EPS growth rates are nonsensical. This is because its current earnings are negative. Meanwhile, Wall Street's analysts expect future growth rates of 50%.

Here's how Western Refining compares it its peers for trailing five-year growth (only ConocoPhillips has meaningful data here):

Source: Capital IQ, a division of Standard & Poor's; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years:

Source: Capital IQ, a division of Standard & Poor's; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us how cheap shares of Western Refining are trading, how consistent its performance has been, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at its negative P/E ratio.

The refining business is highly cyclical and times are tough right now -- as evidenced by the losses in each of the companies except the more integrated ConocoPhillips. Those who believe better spreads are ahead for the refining industry may want to explore further. Valero and Sunoco have been on my personal watchlist for a while now.

The numbers are just a start. If you find any of these companies' numbers compelling, don't stop. Continue your due diligence process until you're confident that the initial numbers aren't lying to you.

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