Valero Energy Corp. (VLO) analysis
Valero Energy Corporation (VLO) has been on our watch list for almost six months now. We have watched as this stock fluctuated along with the price of oil. When oil goes up, VLO follows suit; when oil tumbles so would VLO. Trading at $48.89, just a few point above its 52 week low of $46.84, we believed this stock is starting to look attractive. The last couple of days have been rough for VLO shareholders as oil has fallen over 10%, closing today below $56/barrel. The fundamentals of VLO have not changed; VLO is still making tons of money and will no doubt continue to do so. Unless something has changed, our cars still need gasoline. Moreover, no new refineries are being built in the U.S.; even if the government approves building more refineries, who would wants them in their backyard? From this perspective, this is one business where investors shouldn’t need to worry about revenue stream.
If everything is so great, why is the stock dropping? The major concern is over margin, as oil drops so will their margin. However, one thing to keep in mind with oil is OPEC. All OPEC needs to do is cut production and the prices will stabilize and increase. On many occasions, OPEC has made it clear they want the price of oil to be above $50/barrel. For some reason, people tend to forget this. So there you go, you got a product that is always going to be in demand, little competition, high barrier to entry, and the power of supplier is very strong. This all adds up to one thing, a solid business.
Let’s take a quick look at the technical. Trading at P/E of 5.5 with earning per share of $8.89, this stock way undervalued in comparison to BP, CVX and XOM. Looking at their revenue, earnings over the last several years have been “through the roof” as oil prices have increased. Our prediction; if VLO continues to trade in the mid 40s, VLO will increase their stock repurchase. However, we feel the temporary dip in oil price which is causing VLO to drop below $50/share is an opportunity to buy. The recommendation is to keep your eyes open; hopefully it falls to $46-$47 per share. If you are fortunate enough to be able to buy it at this price, the upside would outweigh the downside.
