With Significant Upside Potential, Valero Is A Buy On The Recent Pullback

May. 7.13 | About: Valero Energy (VLO)

Valero Energy Corp. (NYSE:VLO) shares were recently trading at about $45 per share, but a recent pullback is providing investors with a buying opportunity at just around $37. Valero is the world's largest independent petroleum refiner and marketer with 16 refineries and 10 ethanol plants in the United States, Canada, the Caribbean, and the United Kingdom.

When considering valuation, Valero shares look cheap in a number of ways. Analysts expect the company to earn $5.48 per share in 2013, and $5.66 in 2014. At just around $37 per share, this implies a price-to-earnings ratio of less than 7 times earnings. Many well-known energy stocks like Exxon-Mobil (NYSE:XOM) trade for about 10 times earnings. The average stock in the S&P 500 Index (NYSEARCA:SPY) trades for about 16 times earnings, so Valero is trading at a significant discount to industry peers and the market in general. In terms of book value, Valero also looks undervalued. The average stock in the S&P 500 Index trades for about two times book, but book value at Valero is $32.66, so it is trading for just a slight premium to book value and at a discount to many other stocks.

Valero has been reporting solid financial results. In the fourth quarter of 2012, it announced net income of $1 billion, or $1.82 per share, which compares favorably with net income of $45 million, or 8 cents per share, for the fourth quarter of 2011. For 2012 (full-year), net income was $2.1 billion, or $3.75 per share. However, it would have been higher as this included noncash asset impairment losses of $983 million after taxes, or $1.77 per share, and severance expense of $41 million after taxes, most of which was attributed to the shutdown and impairment of a refinery in Aruba.

Valero has been considered to be a takeover target in the past by some analysts and that potential remains, especially with the stock down. While a buyout is not needed for this stock to provide solid gains for investors, it could be a bonus if a deal is announced in the future.

The refining business does have risks, which include price volatility, weather and even fire or other hazards, however, Valero has made significant capital investments at the Port Arthur and St. Charles facilities, which helps to reduce risks that could be caused by lack of maintenance or older equipment.

On May 1, 2013, analysts at Barclays (NYSE:BCS) reiterated an overweight rating and set a $72 price target. That would give investors who buy now at just around $37, upside potential of roughly 100%. It's not easy to find that type of potential in an overbought market, but Valero has it.

Key Data Points For Valero From Yahoo Finance:
Current Share Price: $37.82
52-Week Range: $18.28 to $44.76
Dividend: 80 cents, which provides a yield of 2%
2013 Earnings Estimate: $5.48 per share
2014 Earnings Estimate: $5.66 per share
P/E Ratio: about 7 times earnings

Data sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VLO over the next 72 hours. 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.