5 Reasons Valero Is Worth Buying On The Recent Dip

| About: Valero Energy (VLO)
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Valero Energy Corp. (NYSE:VLO) shares recently hit new 52-week highs when it traded over $34, however, it has pulled back sharply in the past couple of weeks. This gives investors another chance to buy shares of this energy industry leader. Valero operates refineries, fueling stations and convenience stores. Here is a closer look at the company, along with 5 reasons to consider buying the stock now that it has seen a correction:

1. When compared to the average P/E ratio of about 14 for the S&P 500 Index, this stock looks very undervalued. Valero shares are now valued at just about 6 times earnings and trade below book value, which is $30.06 per share.

2. Valero has announced plans to divest its retail business which consists of gas stations and convenience stores. This deal could be worth about $3.5 billion and it might attract private equity buyers. The company is also considering a tax-free spinoff to shareholders. This would make the company more of a pure play on the refining business and it could unlock shareholder value.

3. Valero has been considered to be a takeover target in the past by some investors and analysts. Once a sale or spinoff of the retail business is complete, it might be more attractive as a buyout candidate since it will be focused on refining. While a buyout is not needed to for this stock to provide solid gains for investors, it could be a bonus if a deal were to happen.

4. A number of refining companies expect earnings to drop in 2013, but analysts expect Valero to show growth. Valero has made significant capital investments at the Port Arthur and St. Charles facilities which will allow the company increase production of diesel fuel.

5. Valero has been reporting solid financial results. For the second quarter of 2012, it reported net income from continuing operations of $831 million, or $1.50 per share, which compares favorably to net income of $745 million, or $1.30 per share, for the second quarter of 2011. It also announced it would raise the quarterly dividend from 15 cents to 17.5 cents per share. Valero is expected to report third quarter results on Tuesday, October 30, 2012, and it could be poised to report another strong quarter.

The refining business is capital intensive and it can also run into weather issues, operational problems and safety hazards. For example, Chevron (NYSE:CVX) recently experienced a major fire at its Richmond, California refinery. However, with Valero shares at about 6 times earnings, and with a solid dividend yield, investors are likely to be well-rewarded for the risks they are taking.

Key Data Points For Valero From Yahoo Finance:
Current Share Price: $29.66
52-Week Range: $19.12 to $34.36
Dividend: 70 cents which provides a yield of 2.4%
2012 Earnings Estimate: $4.60 per share
2013 Earnings Estimate: $4.84 per share
P/E Ratio: about 6 times earnings

Data is 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, and no plans to initiate any positions within 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.