Valero Will Boost Your Portfolio In 2013
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With oil only trading around $86, a lot of investors have not been focusing on the Black Gold lately as depressed demand and solid supply have pushed oil prices to their current levels. Additionally, the drop in demand gave prices at the pump some relief. While this type of oil environment is here currently, I do not expect it to stay. Once these fiscal cliff matters are handled, I believe we could see the beginning of an oil comeback. Currently, oil charts are hinting at a seasonal bottom in the coming days to weeks, this gives ground to my thesis of higher oil earlier next year.
While higher oil is not ideal when looking at it from a consumer point a view, as investors this spells opportunity. Depressed crude oil prices have caused oil companies to get hair cuts as their profit margins fall. This is why I like Valero Energy (NYSE: VLO). Valero is up 41% year to date but the stock could be trading at much higher levels. First, lets look at a valuation of the company and compare it to some of its competitors.
Valero has a market cap of $16 billion and currently has a "hold" rating from analysts. The stock has a price to earnings ratio of 14.6 and a forward price to earnings ratio of 6.24. However, debt is not a concern here with cash per share of $4.60. Valero can safely pay out 2.4% dividend yield. Valero's earnings growth next year looks weak at only 1.1% and 6.13% over the next five years. Furthermore, the company has management efficiency ratios of return on assets of 2.6%, return on equity of 6.5% and return on investment of 3.6%. These numbers are not all that great and do not show that management is doing an absolutely superior job. As you can see, the earnings growth and management efficiency ratios are a bit low, but the valuation is extremely cheap. I will compare Valero's results with a few competitors: Marathon Oil (NYSE: MRO), BP (NYSE: BP), Anadarko Petroleum (NYSE: APC) and Kodiak Oil & Gas (NYSE: KOG).
Marathon Oil has a market cap of $21 billion. The stock currently carries a "hold" rating from analysts. The company has a price to earnings ratio of 12 and a forward price to earnings ratio of 9. Marathon Oil's revenue growth came in higher than the industry average of 3.2%. Marathon Oil's revenues rose by 10.6% since the third quarter of 2011. This growth in revenue has impacted its bottom line, thus improving earnings per share.
BP has a market cap of $129 billion and has a "hold" rating. The company has a price to earnings of 7.36 and a forward price to earnings of 7.7. BP is still in the shadow of the oil spill but some investors are saying that 2013 could be the first meaningful year since the oil spill. BP recently said it would pay $4.5 billion to resolve criminal and civil charges pertaining to the Gulf Oil spill. In an effort to boost its stock, which is now trading at around one third of its pre-Gulf disaster value, BP is planning a $5.9 billion share buyback.
Anadarko Petroleum is another high flying, popular energy stock that was hit hard a few years back. The company has a market cap of $35 billion and has a "buy" rating currently. Anadarko Petroleum has a price to earnings of 20 and a forward price to earnings of 16. The company reported revenue of $3.3 billion in the third quarter quarter, which missed the $3.42 billion analyst estimate, but surpassed its third quarter 2011 level of $3.19 billion. Anadarko's year-over-year revenue growth was primarily due to a 13.5% increase in oil sales from the third quarter of 2011, which made up for lagging sales from natural gas.
Kodiak is the smallest of this group with a market cap of $2.4 billion and a "hold" rating from analysts. The stock has a price to earnings ratio of 41 and a forward price to earnings of 13. Kodiak reported production of approximately 3,900 BOE per day in 2011. The company expects to wrap up 2012 with production of 27,000 BOE per day. Kodiak is another energy player investors should follow closely.
At the end of the day, Valero has the best valuation of these competitors. Additionally, we could see a bump in Valero if the Obama administration approves the Keystone Pipeline. Another big development is Valero's announcement at the beginning of August that it would spin off the company's retail locations sometime in the next six months. We could see this spin off take place by February. Remember that spin-offs and spin-off parents tend to outperform the broader market over a year.
I anticipate that Valero will trade near $40 by the end of 2013. The company has a lot going for it right now, and the fact that it has remained relatively out of sight on Wall Street, gives point that we could see a return to this name as oil rises. Watch news on spin-off details and be prepared to potentially buy this name early next year after the fiscal cliff nightmare is behind us.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!