Is Valero’s Business Lucrative Enough for Investors?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Valero Energy Corporation (NYSE: VLO) is an independent petroleum refining and marketing company. Through their refineries, Valero can produce conventional gasoline, distillates, jet fuel, asphalt, petrochemicals, lubricants, conventional blend stock, reformulated gasoline blend stock, and diesel fuel, from its 16 refineries scattered across the United States. The company also owns 10 ethanol plants with the combined production capacity of about 1.1 billion gallons per year. Valero employs 22,000, and is valued at $17.24 billion on the New York Stock Exchange. Over the past year Valero’s stock has rallied 49.78%, vastly outperforming the S&P 500, which has only rallied 19.53% over the same time period. So is Valero’s business lucrative enough for investors?

 

Rock-Solid Fundamentals

In 2003, Valero reported earnings per share of $1.28. In 2013, the average analyst consensus believes the company will derive $4.40 per share from its business operations. This represents a 243.75% increase in earnings per share over the course of a decade, which runs through the financial collapse of 2008. Based on these statistics, the company’s compound annual growth rate (CAGR) is 13.14%, a remarkable feat for a company of such magnitude. Over the course of the next decade Valero should be able to grow at an annualized high single digits rate, as the company becomes further established. Additionally, the company pays out a decently sized dividend that is a little icing on the cake. Currently, the company pays out quarterly dividends of $0.17, or an annual dividend of $0.68, which at current prices, puts the dividend as yielding 2.24%. This is up from 2011’s annual dividend of $0.60, and is further expected to expand into the future. By 2014, the street expects Valero dividend to reach $0.73 annually. From this we can see Valero’s underlying long-term financial strength and decently sized dividend.

The chart below displays Valero’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

 

 

Courtesy of Zonebourse.com

Road into the Future

Valero’s business model is very simple. Valero buys inexpensive crude oil from companies that take the black gold out of the ground without doing anything to it, and Valero converts it into more valuable products, such as gasoline and diesel, and then sells its products on the open market at a premium to what it bought it for. Valero’s profit is the difference between what it sells its products for minus what it bought the products for plus operating expenses. The more crude oil Valero refines, the more money the company will make. As Valero opens more and more refineries, its capacity grows, as does its profits. Over the years Valero has reinvested in its business consistently, and I see no reason why they will take their foot of the gas anytime into the future. The chart below displays the company’s stock price, the price of gasoline, and the price of WTI crude. Valero buys WTI crude and sells gasoline on the open market.

 

The supply of oil is dwindling. Finding oil is becoming harder and harder. Oil giants are forced to search farther and wider for this black gold. Eventually, not in the near future, but someday, there will be no oil to find. Energy needs will have to be fulfilled by other methods and processes. Valero realizes this, and has begun to invest in the energy of tomorrow. In 2011, the company acquired 10 state-of-the-art corn ethanol plants, with the capability of producing 1.2 billion gallons of ethanol a year combined. The company also operates 33 wind turbines in the Texas Panhandle, which can produce 50 megawatts of electricity. Valero realizes the importance of preparing for the energy needs of tomorrow, and should invest heavily in this segment of its business.

The chart below displays Valero’s map of operations.

 

Courtesy of Valero's 2011 Annual Report

Who Is the Industry Leader?

Compared to some of Valero’s most prominent competitors, such as: Tesoro (NYSE: TSO), Alon USA Energy (NYSE: ALJ), Western Refining (NYSE: WNR), and Marathon Petroleum (NYSE: MPC), Valero compares relatively favorably.

 

2009-2014 EPS Growth

Current Dividend Yield

2009-2014 Dividend Growth

VLO

200.54%

2.24%

21.67%

TSO

374.26%

1.21%

20.00%

ALJ

            95.93%

1.17%

0.00%

WNR

153.72%

1.14%

50.00%

MPC

12.14%

2.71%

30.77%

       
 

Price/Earnings Ratio

Price/Earnings/Growth Ratio

Net Profit Margin

VLO

10.76

1.07

1.66%

TSO

8.55

0.29

1.80%

ALJ

38.51

                  2.35                 

0.59%

WNR

20.49

0.69

1.43%

MPC

7.35

0.62

3.24%

In terms of growth, Tesoro is the industry leader, while Marathon is the industry laggard. All companies in the sector pay out decently sized dividends, with Marathon possessing the largest dividend, and with Western possessing the fastest growing dividend. In the fundamental ratio comparison, Marathon is the industry bargain, while Alon trades at a premium to its peers. When growth is taken into account, Tesoro is the industry bargain, while Alon once again trades at a premium to its peers. In the net profit margin comparison, all companies possess meager margins, yet all are profitable.

The Foolish Bottom Line

Valero is a highly diversified refining company that will not be put out of business because one of its properties falling to a natural disaster. The company’s financial strength is tremendous and the company possesses an annualized double digit growth rate that should flatten out into the future. The company’s dividend is decently sized, and the company understands the importance of reinvesting in its core business, as well as the business of tomorrow. While I believe it will be a long-time until Valero reaches its all-time highs up around $70, I do not find it out of the question that one day the company could be pushing new all-time highs.       


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Western Refining. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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