The refiners are seeing boom times. With favorable crude spreads, Valero Energy Corporation (VLO) is expected to grow earnings by double digits in both 2011 and 2012. Yet shares are still attractive at just 10x forward estimates.
This Zacks #1 Rank (strong buy) manufactures power, fuels and other petrochemical products at 14 oil refineries, 10 ethanol plants and a 50-megawatt wind farm.
The company also operates 5,800 retail outlets for fuel in the U.S., Canada and the Caribbean under the Valero, Diamond Shamrock, Shamrock, Ultramar and Beacon brands.
No Added Business From Japanese Outages
After the Japanese earthquake took several of Japan’s refineries off-line, it was thought that refiners with big West Coast operations, like Valero, might benefit from new business.
But Valero’s CEO told Bloomberg on Mar 20 that Japan will not likely turn to the West Coast but will instead source mainly from other Asian markets and possibly the Gulf Coast, if supplies tighten.
Valero Expanding In the U.K.
On Mar 11, Valero announced it was purchasing Chevron’s Pembroke Refinery in Wales and extensive marketing and logistics assets throughout the U.K. and Ireland for $730 million, including the working capital, which is estimated at another $1 billion.
The deal also includes ownership interests in 4 pipelines, 11 terminals and 1,000 service stations.
The deal will be funded from available cash and is expected to close in Q3.
The refinery is one of Europe’s largest, with a capacity of 270,000 barrels per day. It remained profitable even during the recession so Valero expects it to be immediately accretive to earnings.
First Quarter Interim Update
On Mar 2, Valero spooked investors by providing a first quarter earnings per share guidance of just 15 to 30 cents. That included an after-tax loss of $348 million, or 61 cents per share, on the closing of a hedged position.
The guidance threw estimates off a bit, as the first quarter Zacks Consensus Estimate has fluctuated over the past 60 days, rising 20 cents to 47 cents in that time. But it is down from 55 cents just 30 days ago as 7 estimates have risen and 3 have lowered in that time.
Valero is scheduled to report first quarter results on Apr 26.
Zacks Consensus Estimates Still Jump for 2011 and 2012
Because the first quarter included the one time hedging loss, analysts appear to be discounting that and looking at the crude spread which will fuel earnings this year.
The 2011 Zacks Consensus Estimate has risen to $2.95 from $2.71 in the last month with 11 estimates revised higher and 3 lower in that time.
That is earnings growth of 74%.
Analysts see the strong growth continuing in 2012 as well. 10 estimates have moved higher and 1 lower for the year in the last 30 days pushing the Zacks Consensus to $3.43 from $3.19 per share.
That is another year of double digit earnings growth at 16.1%.
Shares At 52-Week Highs
Shares of Valero have surged to 52-week highs as the crude spreads have widened.
But as you can see from the 5-year chart, they are still well off the 2007 highs.
There’s Still Value
Valero is not an expensive stock, despite the recent stock movement. Not only does it have a low P/E ratio, but its price-to-sales ratio is well under 1.0, at 0.2.
The company also has an attractive price-to-book ratio of 1.1, well under the 3.0 I use to determine “value.”
As an added bonus, shareholders are rewarded with a small dividend of 0.8%.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.
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