The Caltex Australia Limited (ASX: CTX) share price lost ground this morning after Deutsche Bank downgraded the stock following its strong share price run yesterday.
The CTX share price slumped 1.4% to $28.49 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained 0.3% at the time of writing.
The drop stands in contrast to the near 5% rally in the Caltex share price on Tuesday when the petrol supplier and retailer posted an above guidance full year profit result and announced a circa $260 million share buyback.
Fuel not floating to the top
But the news wasn't enough to keep Deutsche Bank onside with the broker cutting its recommendation on the stock to "hold" from "buy" as the departure of Caltex's general manager for its convenience retail division and a more aggressive Coles Group Ltd (ASX: COL) prompted it to take a more cautious stand on the stock.
"We remain comfortable with our thesis that the current low fuel price environment will support retail fuel margins and that refining margins will eventually mean revert which could drive multiple re-rating to compound the ensuing earnings upside," said Deutsche.
"However, a lot has changed since we upgraded to 'Buy' on 18 December."
Since the upgrade, the stock has bounced 11% and the resignation of the top executive overseeing the retail stores attached to the petrol stations only after 18 months in the job made Deutsche feel less confident that Caltex will meet its retail earnings target from the ongoing transformation program.
The Coles Group Threat
What's more, there's expectations that Coles will be ramping up its Coles Express business as it fights for growth following its lacklustre results earlier this month.
Coles owns around 685 Coles Express sites around the country which are attached to its Shell-branded petrol stations.
This business had been neglected by the supermarket giant, in my view, and it had suffered a bruising standoff with its fuel supplier Viva Energy Group Ltd (ASX: VEA) – although it was probably more bruising for Viva.
A better alternative to Caltex?
Both parties have recently reached a truce and Coles management is now likely to be focusing more on this part of the business to eke out much-needed revenue growth.
Deutsche thinks that Coles Express is about to become more competitive on price after a three-year hiatus and it believes Viva makes a better option for investors looking to gain exposure to the domestic fuel market.
Deutsche has a "buy" on Viva with a price target of $2.40 a share. The broker has a target price of $27.50 on Caltex.
