Chasing Value: Valero Energy (VLO) is just so refined
Posted by: in Companies Competitive StrategyFiled under: Competitive strategy, Valero Energy (VLO), Bargain stocks, Chasing Value, Oil, Stocks to Buy, Best Stocks for 2008
If you do not own Valero Energy Corporation (NYSE: VLO) already, you weren’t listening last year when I was ranting and raving every month why this was a must-own stock. It was one of my favorites last year, remains one of my favorites now and looks to have an open road ahead of it in 2008.
Valero’s profit margins were squeezed in the second half of 2007 by high crude prices rising while pump prices were stable, but that is prone to change, and I think the stock can continue to appreciate significantly. It may not change fast , as the economy is going through some rough spots. Also, VLO, which is reporting earnings on January 29, might still have some lingering margin issues.
Last year this was one of my top picks and jumped 36%. I rarely make specific predictions as analysts tend to do, but I feel comfortable stating VLO can beat all the major indices. Everything I liked about Valero last year is still in play now, so I’m letting this winner ride.
I’ve no idea what Wall Street is thinking, but VLO still seems too cheap with a P/E of 8 (TTM), a P/S of 0.43 and still no one seems to be building any new refineries, except outside the United Says. Valero remains the largest independent refiner of heavy and lightweight crude in North America. This could hardly have changed since last year, given that it would take a decade to build a new refinery from scratch.
The five-year chart shows the 2007 ride. It looks to have faltered along with the overall market but never retreated to anywhere close to the entry point near fifty. VLO closed at $70.55 per share on December 28, 2007, our starting point for this journey.
I do not want to give anyone the impression that Valero is the screaming purchase it was last year at this time when the P/E was 5.8. However it continues to have some very favorable metrics like an ROE of 32%, ROA of 16% and a ROIC of 25% — very solid indeed. It has a P/B of 1.89 and pays a small dividend of 0.69%.
The chart indicates I bought in near the low point over the last two years. The stock is about 12.5% off its 52-week high now, and I think it can reach a new high this year. Unless they start giving away the oil, this seems like a modest goal.
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Disclosure: I own shares of VLO
To find potential opportunities and verify my track record read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the design and research principal for an architecture & planning firm.
Troubled vehicle maker 
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