The last three months have been hugely rewarding for investors in Caltex Australia Limited (ASX: CTX), with shares in the company rising by 31% over the period. This is a hugely impressive performance and easily beats the ASX's return of 3% during the same timeframe. However, there could be much more to come and investors may wish to stick with their shares in the company for these three reasons.
Strong results
Recent interim results released by Caltex showed that there is plenty for investors to be enthused about. For instance, while operating profit only increased by $2 million to $173 million, the company confirmed that it is implementing a major strategic review and efficiency program that could save the business up to $100 million per year. Clearly, this could prove to be good news for the bottom line, with particularly strong performance from the marketing and distribution division (where operating profit increased by 7.7%) also offering encouragement to shareholders.
Future potential
One of the downsides of investing in Caltex is its high P/E ratio. Indeed, Caltex looks expensive on both an absolute and relative basis at first glance, with the company's shares currently trading on a P/E ratio of 23.6. This does not compare favourably to the ASX's P/E of 16, but when the company's considerable growth prospects are factored in, it's an entirely different story.
For example, Caltex is due to increase EPS from $0.955 in 2013 to $1.362 in the current year to December 2014. This would represent a gain of 42.6% in just one year and there is another year of strong growth forecast in 2015. EPS is due to reach $1.74 in 2015 and if this figure is met it would equate to a year-on-year growth rate of 27.8%.
Good value?
With growth of 42.6% pencilled in for the current year and growth of 27.8% due for next year, it's clear that Caltex is a top notch growth play. However, when this growth rate is combined with the P/E ratio, it highlights that the company's shares also offer growth at a reasonable price. That's because they trade on a price to earnings growth (PEG) ratio of just 0.67, which is well below the ASX's 1.78. This shows that Caltex's P/E ratio, while a useful guide, does not paint the full picture.
Looking ahead
While Caltex has seen its price rise significantly in recent months, shares in the company still offer good value when the forecast earnings growth rate is taken into account. Indeed, with strong recent results, stunning prospects and a share price that indicates growth at a reasonable price, Caltex could be worth holding onto despite gaining 31% in the last three months alone.
