As readers of my columns know, I am a big fan of the domestic sector as North America is going through an oil and gas production revolution. After the last six months of rally, the sector is still attractive but not as appealing as it was back during last summer's swoon. One area of the sector that has had modest gains is the refining space. Given its low valuations and the fact that the major integrated oil firms like ConocoPhillips (COP) and Chevron (CVX) are shedding refining assets; I think it offers investors good value at current prices. One stock that I like in this area is Valero (VLO).
6 reasons VLO is a solid buy at $26 a share in an improving economy:
- The stock looks like it has gone through a multiple year bottoming process. It was three times higher before the financial crisis and just crossed over its 200 day moving average again (See Chart).
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- The stock is near the bottom of its five year valuation range based on P/B, P/S, P/CF and P/E.
- The company is showing rising earnings. Valero made $3.38 in FY2011, is projected to earn $3.59 in FY2012 and analysts have it making $4.15 a share in FY2013.
- U.S. refiners will continue to benefit from cheap natural-gas energy costs which should help Valero's margins.
- Credit Suisse has an "Outperform" Rating and a $37 price target on Valero. The median analysts' price target on Valero is $30 a share.
- The stock is cheap at 87% of book value, 11% of annual sales and 4 times operating cash flow. Valero also has a low five year projected PEG (.62) and provides a dividend yield of 2.4%.