In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
When Coach Reeves asked if I could step up and lead Motley Fool Global Gains pick Sasol
Kidding aside, Sasol's unfortunate opponent in the round of eight, Diageo
- Sasol currently produces more than 160,000 barrels of jet, diesel, and other distilled fuels per day, which equates to roughly a quarter of South Africa's fuel needs in total. They do this without using so much as a drop of petroleum.
- The company, which operates in 30 countries and recently opened offices in China and India to better assess growth opportunities in those countries, generated $1.6 billion in profits off of $10 billion in revenues in 2006.
- The firm's gas-to-liquid (GTL) and coal-to-liquid (CTL) technologies represent a potentially explosive long-term driver of growth.
Sasol has been in talks with at least two U.S. governors of coal-rich states who have expressed an interest in Sasol's patented CTL technologies. The adoption of CTL technology could quickly gain steam in the U.S. thanks to high oil prices, our mounting desire to decrease our dependence on foreign sources of energy, and the current lack of economically viable fuel alternatives. Should the technology gain traction, Sasol, which is the worldwide leader in the space, would profit handsomely.
Back to my Captain Morgan-swilling opponent. As I touched on earlier, Diageo is a flat-out great company. As Fools know, however, a great business does not a great value make. In Diageo's case, I find little that excites me about its current valuation. The current price-to-book of 6.6 actually stands slightly above its average over the past couple of years, as does the current P/E, which is a shade over 17.
Are the company's brands and profitability exciting? Sure, who doesn't love a good single malt and fat returns on equity? At this point in time, though, the valuation just doesn't scream "Stock Madness Winner."
Sasol, on the other hand, brings to the table both fat profits and a leaner valuation. The company's return on assets and return on equity of 18.8 and 27.6%, respectively, over the past 12 months are tasty sized, as is its net margin of 15.7% over the same period. On the valuation front, Sasol is trading at just 10 times its trailing-12-month earnings from continuing operations.
Baked into that low multiple is the ever-present discount resulting from eternal volatility in energy prices and the threat of a windfall profits tax on the company by the South African government. One would hope that the current talk of the windfall profits tax is more political hot air than anything else, as adding a further tax burden to such an economic plow horse could be a terrible move for the South African economy in the long run.
Sasol's enormous profitability, compelling valuation, and the potentially hugely valuable call option on the firm's GTL and CTL technologies will push SSL through this round into the Final Four -- and beyond.
Sorry, Nate. Coach Reeves sent me here to win, not to make friends.
Does this stock deserve to move on to the next round? If you think so, simply follow this link and rate the stock "outperform" in Motley Fool CAPS. If not, rate it "underperform." Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.
Do you think you could pitch your favorite stock -- or ditch your least favorite one -- in less than 27 seconds? That's what we're doing over at Motley Fool CAPS. Check out our new stock videos.