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Monday, September 11, 2006

Insider Buying at Western Refining (WNR) & Selling at Limited Brands (LTD)

By Yaser Anwar, CSC of Equity Investment Ideas

INSIDER BUYING: Western Refining (WNR) Date of Trade: 8/30/06 Avg. Price: $23.94

In the 1990s the refinery industry in many parts of the world was burdened by over-capacity and costly new environmental regulations and the big firms were keen to sell off or merge their operations. Which, by and large, they did.

With refining capacity extremely tight, independent refiners such as Western Refining (WNR) have been demonstrating that there is money to be made out of refining. At least enough for WNR's director Frederick Francis, that he has spent $961,933 buying 40,181 shares at $23.94 each in the company.

Francis heavy buying of WNR came just two days after it announced the $1.5 billion acquisition of Giant Industries (GI), another refining and marketing company.

With regulatory approval, the deal will be consummated in the 4th Q of this year making WNR the fourth largest publicly traded independent refiner and marketer in the US.

With the GI acquisition, WNR's crude oil refining capacity by 84% to about 216,000 barrels a day. It will also enhance the amount of sour crude WNR can process. Since sour heavy crude is cheaper than lighter oils, this will dramatically boost the companys margins. WNR also picks up 159 gas stations as part of the deal.

Refining and marketing assets are undervalued in the market, and Western is picking up quality assets at a reasonable price. WNR has predicted that the deal will be immediately and significantly accretive to its earnings and free cash flow.

Merrill Lynch analyst Christopher Moore thinks so too. The GI acquisition gives WNR increased exposure to one of the key fundamental strengths behind our buy recommendation: premium, southwest niche refining margins, he says.

Also, the transaction reduces the risk and volatility around WNRs single refining asset and diversifies earnings outside of the southwest market, added Moore.

WNR was doing rather well even before the GI acquisition. Its second quarter net income soared to $86.5 million or $1.29 a share, compared with $40.4 million a year earlier, driven by higher refinery gross margins and increased refinery throughput.

Why is WNR succeeding where the oil majors failed? Part of the explanation is simply a mastery of detail. Refining is a high-volume, low-margin business; so even minor improvements in the cost process can have a big impact on profits.

WNR has often bought crude oil a few cents cheaper than other companies, kept its inventories a little lower and its manufacturing costs a fraction tighter. Another trick is to buy refineries at an attractively low price, which WNR is doing with its acquisition of GI.

With the stock trading at a Forward multiple of only 10.92, it makes a lot of sense to tag along Mr. Francis and buying WNR.

INSIDER SELLING: Limited Brands (LTD) Date of Trade: 8/29-31/06 Avg Price: $25.33

When the CEO sells $126,243,781 worth of companys stock in the same month that it posted 40% growth in second quarter earnings to $113.1 million, or 28 cents a share, you have to wonder why?

Leslie Wexner, CEO Limited Brands (LTD), hasn't unloaded 5,019,364 shares at an average price of $25.33 in order to buy a new house or fund a vacation. That amount of shares should make investors "ask why?" Enron style!

Could it be that we should read rather more into his expectations that the retailer, best known for its Victorias Secret lingerie brand, faces a challenging 3Q when earnings will be roughly flat?

As CFO Martyn Redgrave mused in a conference call following the announcement of LTDs second quarter results earlier this month, "I think you all know that our third quarter has been a challenging one from kind of a sales volume and profitability perspective, and its particularly challenging because of the investments to prepare stores for the holiday shopping season."

He also forecasted a significant increase in marketing expenses, primarily related to a planned expansion of Victorias Secret, whose same-store sales surged 18% in August on strong growth in its Pink Line particularly in loungewear, underwear and sleepwear. Indeed, LTD, which also includes Bath & Body Works, Express, and Limited Stores, reported group same-store August sales rose 9%, outpacing analysts expectations of 6.2% growth.

Trouble is, its a fashion-based business which must renew itself to avoid being boring and that, as LTD admits, is extraordinarily costly in terms of marketing expenses. If they are eating into LTDs bottom line then the stock, at $25.97 on a Fwd PE of 14.35 may, for the time being, go nowhere fast.

Sources: SEC Filings, IM & Y! F

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