The market certainly has had a fast start to the new year: The indices are up some 3% in the first seven trading days of 2013. This latest rally started late last year, and value is beginning to be a bit harder to find that it was a couple of weeks ago.
Given this, I would like to take another opportunity to profile one of my favorite yield and value plays, Calumet Specialty Product Partners (CLMT). I first talked about the shares in June when they were selling near $22. I again recommended the stock in November, after the post-election selloff, when it was trading at $29. Now, after a 5% pullback triggered by a small secondary offering to reduce debt from a recent refinery purchase, the shares again offer a good entry point at just under $32.
I keep coming back to this unique high-yielder because it is relatively unfollowed in the market, it offers an enticing yield near 8%, and it operates in a niche that I believe will be highly profitable for yield and value investors over time. As most refiners and processors are shedding operations, Calumet is buying up older refineries in the Midwest to process fracked oil and gas. This growing source of refinery input continues to expand, and that should power Calumet's profits far into the future.
The company recently added a small (14,500 barrels per day) refinery in San Antonio, Texas, for $115 million that produces ultra-low-sulfur diesel, jet fuel and solvents. Calumet also produces specialty products such as aviation fuel, of which it is a major provider to the aviation market.
Here are five reasons Calumet still offers compelling value at under $32 a share:
- It provides a yield of 7.8%, and the company has more than doubled distribution payouts since it came public in April 2006. Given the projected earnings increases in fiscal 2013, I would look for payouts to increase at least 10% in the next year.
- The company has easily beat earnings estimates for three straight quarters, and consensus earnings estimates for fiscal 2013 have gone up almost 4% over the last month.
- Despite a high yield, Calumet sells for just over 8x forward earnings. It is also priced at just over 5x operating cash flow.
- Insiders own over 30% of this entity, they don't sell (they have made only purchases over the last two years), and Calumet is exceptionally well-managed. EBITDA has increased at a compound annual growth rate of 24% since the company came public in 2006.
- The company also hedges its production, which has grown at a CAGR of 18% over the past seven years.