The Caltex Australia Limited (ASX: CTX) share price has fallen 12.15% in the last 6 months. Trading at $28.24 on 6 March, Caltex shares have fallen to the current price of $24.78.
Background on Caltex
Caltex is a fuel supplier and operator of petrol stations in Australia and New Zealand. It is involved in the purchase, refining, distribution and sale of petroleum products along with the operation of convenience stores. The company has a market capitalisation of $6.05 billion.
Why I think it's a buy
Caltex trades on a price-to-earnings (P/E) ratio of 11.04x, a discount to the ASX200, which trades on a P/E ratio of 19.36x at the time of writing. Earnings for the first half of 2019 were $155 million, down on earnings of $383 million in the first half of 2018. Its management pointed out that higher costs were the reason for this drop in earnings and has promised to address the issue.
Caltex trades on a grossed-up dividend yield of 7%, a very healthy return with the cash rate at just 1%. Additionally, it has a pay out ratio of only 54% so there is plenty of room for dividend increases. Its management has promised to reduce capital expenditure, which may free up more funds to return to shareholders.
The company has a record of providing a good return on equity (ROE), which has been more than 20% in some recent years. Last year it posted an ROE of 17%, a generous return which can be seen as a sign of quality earnings. This ROE justifies the current Caltex price-to-book ratio, which sits at 1.86.
Caltex has manageable debt with its debt-to-equity ratio sitting at 28.5%. Additionally, it has plenty of cash flow to pay interest on this debt and to reduce it. In the company's 2019 half-year result, its management said it will pay down this debt to bring it more in line with Caltex's current strategy of disciplined use of capital.
In addition, Caltex is undergoing a cost-cutting strategy that involves divesting non-performing stores and converting franchise stores to company ownership. So far this seems to be going well and should improve earnings into 2020.
Foolish takeaway
Caltex trades on a low P/E ratio and has a healthy dividend yield. It has manageable debt and is undergoing cost cutting to improve earnings. I think it's a buy.
