The market began the trading month today with a significant sell-off in the Energy Sector triggered by a $2 to $3 a barrel pullback in oil prices. This continues the underperformance the industry has experienced all year versus the overall market. Some stocks in the sector are starting to look very cheap here. One I particularly like here is North America's largest refiner, Valero (NYSE:VLO). The shares have dropped some 20% since mid-March when I wrote that it was time to lighten up on the refiners and pared my holdings. However, the decline in the shares has now provided a good buying opportunity and I am now adding to my position in today's sell-off.
Recent positives on VLO:
- The company easily beat on the top and the bottom lines when it reported its quarterly results earlier this week.
- In early April the company announced its board approved a spinoff of its retailing business (some 1900 gas stations). The company just completed the promised transaction. This will result in a more focused and pure play refinery company and should result in higher multiples for the equity in time.
- The company has stated that it will explore a spinoff logistics and transportation business into an MLP once the retailing divestiture is complete. This could unlock additional shareholder value.
- Oppenheimer recently divulged it is getting more positive on the refinery sector after its recent decline, including Valero.
4 additional reason VLO is a good value pick up at $39 a share:
- The mean price target of the 17 analysts that cover the stock is just over $51 a share, some 30% above the current stock price.
- The stock is cheap at just 23% over book value and just over 4x operating cash flow.
- The company has now easily beat estimates on the bottom line for six straight quarters and consensus earnings estimates for FY2014 have moved up 2% over the last month.
- VLO is selling at under 7x 2014's projected earnings and the stock also yields 2%, more than ten year treasuries currently.
Disclosure: I am long VLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.