Should You Buy Caltex Australia Limited at this Share Price?

What Happened to the DOW Share Price?

Caltex Australia Limited [ASX:CTX] was mostly flat today. The stock was trading at $34.98 a share at 3pm today, which was a 0.1% gain on yesterday’s close. The Aussie market declined amid heavy drops in commodity prices. The fall on Wall Street overnight also added to the selling pressure.
The iron ore price continued to fall and crude also fell back a little. There is no doubt about it, it is a sellers’ market right now, and expectation is building for a rate cut from the Reserve Bank of Australia.

Why Did This Happen to CTX Shares?

Caltex has been a market darling in the past year. Its stock price rallied by roughly 80% during the year. However, its share price was hit unexpectedly on Monday. Oil major Chevron sold its 50% stake in Caltex at a discount of $35 a share. This was the largest single block trade ever recorded on the ASX, at a value of $4.7 billion.
Caltex immediately suffered an 8% decline in its share price. Believe it or not, this is not the most severe overnight fall in Caltex’s book. The worst fall in recent years occurred on 28 June 2013. The stock fell by 12% before the market opened that day.

What Now for CTX?

For 2014 results, the group far exceeded its guidance, with a 48.5% lift in net operating profit. The dividend was a mouth-watering 50 cents per share.
What investors need to keep in mind is that Caltex, the leading provider of transport fuel in Australia, hasn’t been terribly affected by the deflating oil price. In Caltex’s case, refining margin was actually helped by lower Brent prices.
The group’s fuel-marketing business was the main driver behind the positive results. At the same time, we realise the fundamental strength is in the Caltex network. Not only is Caltex able to create value through its fuel-marketing network, it will also be able to leverage it to create a strong convenience store portfolio.
What it also means is Chevron’s sale frees up more room for Caltex for potential M&A activities with other retailers. Another retailer would create synergy with Caltex’s wide petrol station network in Australia.
The company is shifting focus away from petrol refining, which will help to further diversify its interests and revenue streams. Although the Chevron sale caused the Caltex share price to dip, it has inevitably made it more attractive for investors.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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