The Refiners Are On Fire

| About: Valero Energy (VLO)

Refiners have been on fire recently (See Chart). This is fortunate since this sector has one of the biggest allocations in my portfolio due to their cheap valuations as well as their improving growth prospects and fundamentals. Barclays recently put out a powerful case for owning these equities. In these columns I have highlighted the case for Phillips 66 (PSX), Tesoro (TSO) and Valero (VLO) among others. The latter had a stellar earnings report today that confirms the company's recent momentum.

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Key highlights from Valero's earnings report:

  • The company reported earnings of $1.50 a share, handily beating estimates of $1.42 a share.
  • Revenue was up almost 11% (The fifth straight quarter of double digit sales growth) to $34.7B more than a billion dollars over consensus estimates.
  • The company also announced it plans to spinoff its retailing operations which should be positive for the stock given the low margins in that segment.

Four reasons VLO is still a value at under $27 a share:

  1. Despite the stock's recent run up, VLO still sells near the bottom of its five year valuation ranged base on P/E, P/S, P/B, P/CF.
  2. The stock is still cheap. Valero goes for less than 6 times forward earnings (and look for estimates to revised up) and 90% of book value.
  3. The stock has a solid balance sheet, it yields 2.3% and crack spreads are still positive.
  4. The mean analyst price target by the 12 analysts that cover the stock is north of $34. Credit Suisse has an "outperform" rating and a $37 price target on VLO.

Disclosure: I am long PSX, TSO, VLO.