Valero Energy: Great For Value Investors and Risk Takers
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It has had a rough ride through the market, but Valero Energy Corp (NYSE: VLO) has a lot of value buried in it. Investors with long term horizons need to look closer at this oil refiner and marketer. With luck Valero might be able to provide some green to go along with its black gold.
Valero's current share price is around $23.05 which is mid-range 52-week trading band of $16.40-$31.12. It has a market capitalization of $12.9 billion, earnings per share of $3.91 and a price earnings ratio of 5.94 which is incredibly low for an oil refiner in this market. It has a yield of 2.72% off of an annualized dividend of $0.60. It also has a dividend growth rate of 13.4% over the past five years.
Its management and operations numbers are extremely low. Gross margin is only 9.02% while net profit margin is a meager 1.97%. Return on assets is only 5.65% although return on equity is a more respectable 13.93%. Income wise, EBITDA is $2.4 billion and normalized net income is $1.2 billion. For most businesses these are horrid numbers, but refiners work in a unique low-margin environment so in this case the numbers are not nearly as bad as you might think, first glance.
The first reason Valero is attractive it is priced dirt cheap. Its price to tangible book is only 0.8, price to sales multiple is only 0.1 (trailing twelve months) so it is priced extremely cheap. Meanwhile, Valero is a cash cow. It is currently sitting on cash per share of $5.06 plus it is pumping out a positive cash flow per share of $6.54. In effect, buying Valero at its current price you are getting around $28 in assets plus more than $11 per share in cash for your $23 share price.
Part of the low share price is that investors still have not mentally recovered from a period of two years of losses during 2008 and 2009 even though Valero has returned to regular profitability since. Also stock prices for most refiner stock have retreated the last six months of 2011, based on worries of decreased earnings caused by the teetering euro zone market. But there is even more to the story.
The second reason for considering Valero is growth. There is a worldwide shortage of oil refiners and Valero is aggressively expanding internationally and increasing capacity from its current fifteen refineries. The expansion should place it in a position to capture more market share. The strategy envisions that it will become a lower cost provider in many countries since more strategically placed refineries will cut down on transportation costs. Valero is also heavily involved in refining "heavy oil" which is technically much more challenging than what many refiners concentrate on. Refining heavy oil is more costly as well as more difficult, but with petroleum prices staying north of $100 a barrel the niche becomes far more profitable. It gives Valero an advantage in positioning itself in new play areas like the Athabasca Oil Sands area of Canada.
And, the refining shortage looks to play into Valero's hands for 2012. The closing of three refineries in Europe will increase the shortage of refiners for the foreseeable future, and should increase pressure for higher fees as well as demand for Valero's expanding capacity. It is making 2012 look like a rosy future indeed for Valero.
Finally Valero is enough of a bargain that reports have Royal Dutch Shell (NYSE: RDS-A) looking to launch a takeover of Valero. Reports say that Shell reportedly is evaluating the possibility of launching a $48 per share bid. Market watchers are expecting such a bid to start a bidding war for the valuable refiner with Reliance Industries, a privately held refiner headquartered in India, which reportedly also is casting their eye on Valero. Both companies are looking to diversify their refining positions and Valero is the most obvious target. If these rumors become stronger the stock price could skyrocket with speculators diving in. Understand though that any such bid would be months in the making and could easily fade away depending on market conditions.
But whether or not foreign companies start throwing bids at Valero this is still a solid company with a steady niche play within the oil refining sector. It is selling at a dirt cheap price below tangible book while it merrily spins out a strong cash flow and it positions itself to grow into the new refining markets of the future. It looks to be well situated to grow in 2012 but also at least over the next five years. The mere fact of a potentially developing takeover situation simply places a cherry squarely on the top.
Valero is an excellent buy for value investors, as well as those with more risk-taking blood as a play for potential takeover action.
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