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Valero Energy (VLO) is an independent petroleum refining and marketing company based in San Antonio, TX. Trading sharply higher this week, Valero has been able to capitalize on increased mid-continent domestic production. Margins have increased as Valero has proved perfectly capable of handling the Canadian heavy crude coming from North Dakota and Saskatchewan; the same cannot be said of the east and west coast refineries stuck processing imported and expensive offshore product. Hess Corporation's (HES) decision to close its Port Reading, NJ refinery in February is further evidence of the growing discrepancy between mid-con refiners (including Marathon (MPC) and HollyFrontier (HFC)) and those on the edges of the US.

Investors have caught on to Valero's advantage, sending the company up from its 52-week low of $20.37 low on June 4 to $43.73 at 3:25 pm CST on January 29, a climb of 115%. The latest boost was provided by better-than-expected Q4 earnings released on January 29. Q4 EPS of $1.88 easily beat the $1.18 average estimate. The average analyst estimate for Q4 revenues was $31.0 billion; Valero produced revenues of $34.7 billion.

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Valero looks like a stock on the up-and-up, but to a value investor first glance begs caution - have the past six months eliminated an opportunity for a bargain purchase?

The answer is no. Valero is undervalued, and has been since I first valued them in December 2011. I purchased shares at $21.14 on December 8, 2011 and again at $27.69 on March 27, 2012. My target price has steadily increased as Valero continues to improve revenue and margins.

I arrive at my target price by building a comparable basket of similar refiners and comparing the basket average price/performance ratios to Valero. If you wish to recreate my valuation please try your own on, a site dedicated to providing investors with dynamic value investing tools. The Valuator tool is what drives my investing decisions. My most recent valuation (January 29) shows Valero as a solid buy. Using HollyFrontier, Murphy Oil Corporation (MUR), Ultrapar Holdings Inc. (UGP) and Marathon Petroleum Corporation as comparables, I calculate a target price of $72 for a 40% margin of safety.

Source: Is Valero Undervalued?