Earnings Scorecard: Tesoro - Analyst Blog

Earlier this month, independent refiner Tesoro Corporation (TSO) announced its financial results for the third quarter ended September 30, 2010.

Now that the analysts have had some time to ponder upon the quarterly performance of Tesoro, they are weighing in their estimate revisions. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the outlook.

Earnings Review

On November 4, 2010, Tesoro reported third-quarter 2010 results that came in better than expected, buoyed by strong contributions from the refining business unit along with robust distillate exports, a reformed U.S. manufacturing sector and increased port activity nationwide, partially offset by weak gasoline margins.

Net earnings per share, excluding certain expenses, came in at 51 cents, beating the Zacks Consensus Estimate of 43 and the year-ago profit of 24 cents.

After including the after-tax special items, earnings per share for the third quarter 2010 came in at 39 cents.

The company generated revenues of $5.32 billion in the quarter, up 12.2% from the year-ago quarter's revenues of $4.74 billion. The reported quarter results surpassed the Zacks Consensus Estimate of $4.78 billion.

(Read our full coverage on this earnings report: Tesoro Outshines Zacks EPS, Revenue)

Agreement of Estimate Revisions

The following table reflects a positive bias among the analysts regarding Tesoro's outlook. In particular, we see a notable number of estimate revisions over the past 30 days, indicating that the revisions were in response to the company's third quarter earnings release.

Out of 18 analysts covering the stock, 7 have revised their estimates upward for 2010, while 3 went in the opposite direction. Looking forward to 2011, the trend is more or less similar. Out of 19 analysts, 5 hiked their estimates compared to 4 negative revisions.

This uptrend in estimate revisions indicates the potential scope for cash flows to be driven by fundamental improvement in the business. We see ample room for gains over the coming months, especially given the wider industry spreads (particularly diesel), positive signs of economic recovery, and realizations from cost cutting initiatives.

However, the near-term outlook seems to be mixed as indicated by the similar number of positive/negative revisions for the December quarter. Five of the 18 analysts have increased their quarterly estimates over the last 30 days, with the same number making negative revisions.

Apprehensions about the recent seasonal downward refining margin trend have contributed toward the muted sentiment.

Magnitude of Estimate Revisions

As a result of the analysts revising estimates over the past 30 days, the Zacks Consensus Estimates for fiscal 2010 has gone up by a penny (from a loss of 26 cents to a loss of 25 cents). However, despite a handful of positive analyst revisions for 2011 in the last 30 days, estimates fell 3 cents (from $1.34 to $1.31), respectively. Meanwhile, estimate for the December 2010 quarter is up by 3 cents.

Our Recommendation

Despite the robust third quarter results and the company's exposure to the premium margin West Coast region, Tesoro shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We believe that the outlook for domestic refiners remains bleak, as the overall environment remains challenging. The refining markets remain fundamentally oversupplied against the backdrop of excess global capacity and the still weak demand level.

Being one of the largest independent refiners, Tesoro, along with Valero (VLO) and Sunoco (SUN), remains particularly exposed to this unfavorable macro backdrop. While there have been some signs of economic improvement, high unemployment in California and excess refining capacity in the U.S. will continue to weigh on the company's margins.