Does Western Refining Oil Have the Best Growth Story?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up is Western Refining (NYSE: WNR), a regional oil refiner who does the bulk of its business in the west and mid-Atlantic. If you're unfamiliar with how refining works, just know that it's the process of transforming oil into fuel for cars, trucks, and jets.

In simpler terms: Each time you stop at a gas station to fill up, chances are you're doing business with an oil refiner.

Foolish facts

Data current as of Sept. 18.

In the wake of multiple drilling disasters in the Gulf of Mexico, Fools are treating Western as if it were the Ivory soap of oil refining: 99 and 44/100% pure.

"A speculative bet that the hurricane season will limit refinery capacity enough to give the remaining functioning refiners some pricing power to raise their profits. The location of [Western's] refineries are relatively safe and none are in the gulf area," wrote CAPS All-Star investor Beorn10 in July.

Another All-Star Fool, DarthMaul09, responded to that pitch by pointing out Western simply looks cheap. That's still true today. Western trades for less than its tangible book value yet produced positive return on equity in its most recent quarter, a market-beating combination, according to research performed by NYU professor Aswath Damodaran.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's. NM = not material.

These aren't great numbers, obviously. At least there's improvement. Let's review:

• Revenue growth has returned after a brutal 2009 in which BP's troubles in the Gulf spilled onto not just marine wildlife but also other refiners. A new year has allowed Western to set itself apart.
• Gross margin and receivables growth is inconsistent, which is a problem.
• The good news? Although normalized net income is down over the past year, Western recorded a profit in its most recent quarter.

Competitor and peer checkup

Sources: Capital IQ. Data current as of Sept. 18. NM = not material.

None of Western's competitors or peers is doing well, and that's strangely good. Why? Because it means market forces more than management may have contributed to the most recent downturn.

Fortunately, we've seen improvement recently. Returns on capital and equity have turned positive. Also, looking at history, we know Western is capable of producing outrageous growth. Normalized net income soared 198% in 2005 and 57.7% in 2006.

Grade: Unsustainable
Even so, we're testing for sustainable growth, and Western hasn't yet proven it can deliver. I think it's possible that Western will gush profits within the next year or two, but it's equally possible a cyclical downturn in oil would punish today's investors.

My guess is that DarthMaul09 is right. Western Refining is too cheap to ignore right now, but the growth story could end within a year or two. I'm therefore picking Western as a one-year outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Western Refining at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.