Neste oil: a winning stock

Neste's stock has been on the rise since mid-2011. Revenue has risen by 6.5% Y-o-Y while profit has also increased 6% Y-o-Y. Operating profit has increased in all 3 of the company's segments, namely oil products, renewable products and marketing services. Additionally, there could be some tailwinds especially in the renewable fuel division, as the EU Environmental Committee is considering increasing the renewable usage target from its current levels.

The capacity utilization levels for the company are almost 99%, and hence any increase in volumes will need CapEx. Also, any increase in the price of palm oil or any jump in imports of bio diesels from foreign countries will hit margins. On the regulatory front, any policy which discourages palm oil usage will also affect the company, as it is a primary raw material for its renewable fuels.

Neste's valuation seems quite a bit on the lower side, trading at a P/E ratio of 14.7x when compared to Royal Dutch Shell 's 25x and Galp Energia's 25x. The energy sector's industry average is about 25x. We estimate the fair value at $90. The stock is not too heavily dependent on oil and gas prices, since it is involved in renewable fuel and other specialty chemicals.

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