Caltex Australia Limited profits plunge, is it time to sell?

Despite gross retail margins being at record highs for many Australian fuel retailers, Caltex Australia Limited (ASX: CTX) has not been reaping the rewards as you might expect. The transport fuel supplier and convenience retail company released a mixed half year report to the market this morning.

The company revealed that revenue fell 12.3% to $8.5 billion and net profit fell 15% from $375 million to $318 million for the six months ending June 30 2016. Today’s profit result falls in the middle of the guidance range of $310 million to $330 million provided by management at the end of June.

Much of the blame for the drop in profits can be placed on its oil refining margins which dropped down 37% to US$10.10/bbl. As a result earnings before interest and tax at its Lytton refinery dropped to $92 million from $154 million in the prior corresponding period.

This was partially offset by a jump in consumers purchasing the company’s higher margin premium fuels. An increase in sales of vehicles requiring diesel or premium grades of petrol is believed to have led to premium fuel sales volumes increasing by 10% to 2.2 billion litres in the first half. Overall fuel sales volumes remained steady at 7.7 billion litres for the period.

Shareholders will no doubt be pleased to see that Caltex raised its interim dividend from 47 cents to 50 cents. If it were to increase its final dividend by the same rate then investors would be looking at a fully franked 3.6% dividend for the full year based on today’s share price.

Personally I would be surprised to see a great deal of movement from its shares today as the result was largely in line with its guidance and offered little by way of surprises. But one thing that could cause the shares to move would be the potential acquisition of the 521 petrol stations owned by Woolworths Limited (ASX: WOW).

As we covered here previously, Woolworths is rumoured to be looking into offloading them in the near future. Acquiring these assets would likely be a boost to Caltex’s sales and help to further offset the damage being done at the Lytton refinery.

But at 18x trailing earnings with falling profits, Caltex doesn’t necessarily come cheap. Personally, I would suggest keeping away from this one for the time being and focusing on other areas of the market.

Instead of investing in Caltex, I would recommend these three new breed blue chips instead. Each pays a growing dividend and could bolt higher in the months ahead.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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