Get documents about "Investment Rating
Document Sample
Valero Energy Corp. (VLO)
Investment Rating:
Stock Screener
BUY Our fund is currently below the desired
percentage within the energy sector, so I chose a
stock within this sector. Lying within this sector is
Shares: 50
Total Cost: $ 2604
the Oil & Gas Refining industry. I feel this is a
Take Profit: $ 78 strong industry that has seen too sharp a decline
Stop Loss $ 46 recently. Therefore, I set a stock screener to find a
large-cap Oil & Gas Refining company with a beta
less than one to bring our fund closer to a desired
Pricing beta of one. The stock I ultimately chose was
(Close 10/20/06)
Valero Energy Corp.
Closing Price $52.09
52 Week High $70.75
52 Week Low $46.12 Investment Highlights
Company Profile
Profitability &
Effectiveness (ttm) Valero Energy Corp. is the largest refiner in
ROA 16.27% North America. The company has an extensive
ROE 38.62%
refining system with an average daily throughput of
Profit Margin 5.16%
Operat. Margin 7.81%
3.3 million barrels. The company’s refining network
stretches from Canada to the US Gulf Coast and
West Coast to the Caribbean.
Market Data Valero has more than 5,000 branded and
Total Assets 32.73B retail outlets in the US, Canada and the Caribbean.
Market Cap 31.92B The company operates under various names
Avg Vol (3m) 12.84M including, but not limited to: Valero, Beacon,
EPS (ttm) 7.86 Diamond Shamrock, Shamrock, and Ultramar.
P/E (ttm) 6.63 Valero has interest in a number of products
including: conventional gasoline, reformulated
gasoline, jet fuel, kerosene, propane, asphalt, home
heating oil, etc.
Valero also operates convenience stores
where it sells candy, snacks, beer, and other
convenience goods.
Zach Robinson The company was founded in 1955 and
zdrv7v@mizzou.edu headquartered in San Antonio, Texas. It trades
under the New York Stock Exchange with the
symbol VLO.
Valero has more than $80 billion in annual revenues and has total assets
of approximately $33 billion. Additionally, the company houses some 22,000
employees.
Valero is in the news almost every day in some shape or form. In 2006
and 2005 the company was ranked as the world’s number one oil refining and
marketing company by Platts Top 250 Global Energy Company Awards.
Furthermore, Valero was ranked number three among the nation’s best
employers to work for in 2005. Also, the company was ranked third by Forbes on
the magazine’s list of America’s Best Big Companies. The awards and major
accomplishments for Valero go on and on. This just goes to show the strength of
Valero and its management as a whole. Management has created an
atmosphere where employees truly enjoy working while incurring tremendous
financial success.
As you can see, the company has had incredible success over the past
two years and has dominated the S&P with returns of over 150%. Much of this
success is partially due to the increased cost of energy, but as you will soon see
Valero’s success is not solely based on the success of the Energy sector.
2
The following graph shows the success Valero has had up until August
2006. Since that time, Valero’s stock has plummeted. This drop has nothing to
do with a missed earning or poor company news. Rather, it is completely due to
the drop in crude oil and energy prices. Some stocks have been hit harder than
Valero, while others have not been hit quite as hard.
As you can see, Valero was easily beating the S&P up until September
when crude oil prices fell especially flat.
3
Despite this drop, Valero still remains a very healthy firm financially. A
quick financial snapshot of the firm reveals substantial revenue and net income
growth over the past year. In addition, the company has nearly doubled its
earnings per share.
Financial Snapshot More
All data in thousands
2005 2004
except per share amounts.
Revenue 82,162,000 54,619,000
Total Net Income 3,590,000 1,804,000
Earnings per Share 6.10 3.27
EBIT/DA 6,334,000 3,598,000
Long Term Debt 5,109,000 3,901,000
Financial institutions think favorably upon Valero as 70 percent of Valero’s
outstanding shares are owned by these institutions. Furthermore, Valero has a
recent history of stock splits when share prices reach between $80 and $100.
Competition
As stated, Valero operates within the Energy sector. More specifically,
Valero operates within the Oil & Gas Refining & Marketing industry. According to
Yahoo! Finance, the company’s main competitors are BP, Chevron, and Exxon
Mobil. Although it may not be completely accurate to compare Valero to these
conglomerates, the company more than stacks up.
Valero has higher quarterly revenue growth than all three competitors and
offers higher earnings per share. Moreover, the company has a lower P/E ratio
hinting that the company could in fact be undervalued.
Valero has a much lower revenue and net income than the three listed
competitors, but that should be expected because the company does not engage
in quite the same business. The only concerning statistic is a high PEG ratio, but
I do not feel that this indicator alone is strong enough to prove that Valero is
overvalued.
4
DIRECT COMPETITOR COMPARISON
VLO BP CVX XOM Industry
Market Cap: 31.92B 225.93B 143.48B 413.47B 2.92B
Employees: 22,068 96,200 59,000 106,100 2.63K
Qtrly Rev Growth (yoy): 49.10% 24.20% 10.30% 11.80% 39.80%
Revenue (ttm): 96.10B 266.77B 203.08B 348.02B 4.66B
Gross Margin (ttm): 10.34% 21.99% 29.25% 45.56% 15.24%
EBITDA (ttm): 8.63B 44.20B 37.06B 79.43B 634.60M
Oper Margins (ttm): 7.81% 11.84% 12.87% 17.43% 12.76%
Net Income (ttm): 4.95B 21.65B 16.09B 39.39B 203.62M
EPS (ttm): 7.859 6.17 7.260 6.391 3.31
P/E (ttm): 6.63 10.99 8.99 10.88 11.65
PEG (5 yr expected): 2.10 0.76 1.09 1.49 1.12
P/S (ttm): 0.34 0.85 0.71 1.19 0.70
Despite the above stated success, Valero’s stock price has lagged that of
its competitors. I couldn’t find information relating to why Valero’s stock dropped
off in late August. One possible explanation is Citigroup downgrading the
company to ‘hold’ on September 6th. The only other possible relative piece of
information I discovered was a Valero fuel shortage in Texas on August 9 th;
however, this really doesn’t fully explain the drop.
5
Comparing Valero to a more specific group further emphasizes the
company’s financial strength. Valero is second in market capitalization, yet still
has a very low P/E ratio. This information could imply that Valero’s competitors
are overvalued or that Valero is undervalued. Furthermore, although Valero is a
large company, it is still incurring substantial revenue and earnings per share
growth. The two companies ahead of Valero in revenue growth are relatively
new operations relative to Valero. This is a very good signal to Valero investors.
Also, Valero’s earnings per share growth definitely is not scaring investors away.
The only possible concerning statistic among these is Valero’s low dividend yield
(this will be discussed in more detail later).
VLO VS. INDUSTRY LEADERS
VLO
Statistic Industry Leader VLO
Rank
Market Capitalization RDS-B 225.86B 31.92B 2 / 24
P/E Ratio (ttm) CLMT 82.14 6.63 21 / 24
PEG Ratio (ttm, 5 yr expected) IMO 3.94 2.10 4 / 24
Revenue Growth (Qtrly YoY) DK 78.30% 49.10% 3 / 24
EPS Growth (Qtrly YoY) DK 403.00% 95.40% 6 / 24
Long-Term Growth Rate (5 yr) BPT 40.0% 3.1% 18 / 24
Return on Equity (ttm) BPT 1667.88% 38.62% 8 / 24
Long-Term Debt/Equity (mrq) EPE 7.086 0.309 12 / 24
Dividend Yield (annual) BPT 9.20% 0.60% 17 / 24
6
The following graph compares Valero to its more likely competitors. As
you can see, Valero was second in this group until the company took a downturn
in late August as described above. Despite this drop, Valero has still been very
much in line with competitors.
Valuation
To evaluate Valero, I first used the dividend discount model using the
discounted cash flow technique because Valero pays a very nominal dividend. I
used a beta of .51 which was about the average of a few numbers I found and
the number provided by Yahoo! Finance. I used the October 20th risk-free rate
was 4.784% and a market risk premium of 3.70% as decided by the class. Using
this information I found:
k = 4.784% + 3.70% (.51) = 6.67%
Analysts predict earnings per share growth rate of 3.1% for Valero over
the next five years per annum, so I used this number as the constant growth rate.
I decided upon a second stage growth rate of a pessimistic 0.5% to be safe.
Entering all this information provided an intrinsic value of $242.51 for Valero.
This number seems extremely high, but gives an indication that Valero might be
undervalued at its current trading price.
7
Since the discounted cash flow value I discovered seemed somewhat
outlandish, I decided to use the Owner Earnings Discount Model hoping this
would provide a more realistic valuation. I used the same discount rate (‘k’)
value and growth estimates as above to be consistent. Utilizing these numbers
and financial information from Yahoo! Finance, the following was calculated:
Assuming Discount Rate (k) of 6.67%
Adjusted Owner Earnings in 2005
Net Income $ 3,577,000
Depreciation & Amortization $ 875,000
Capital Expenditures $ (2,133,000)
Owner Earnings (5-year avg.) 2,319,000
2006 2007 2008 2009 2010
Prior Year Owner Earnings $ 2,319,000 $ 2,390,889 $ 2,465,007 $ 2,541,422 $ 2,620,206
First Stage Growth Rate (add) 3.1% 3.1% 3.1% 3.1% 3.1%
Owner Earnings $ 2,390,889 $ 2,465,007 $ 2,541,422 $ 2,620,206 $ 2,701,432
Discounted Value per annum $ 2,390,889 $ 2,310,850 $ 2,233,490 $ 2,158,720 $ 2,086,453
2011 2012 2013 2014 2015
$ 2,701,432 $ 2,785,177 $ 2,871,517 $ 2,960,534 $ 3,052,311
3.1% 3.1% 3.1% 3.1% 3.1%
$ 2,785,177 $ 2,871,517 $ 2,960,534 $ 3,052,311 $ 3,146,932
$ 2,016,605 $ 1,949,096 $ 1,883,846 $ 1,820,781 $ 1,759,828
Sum of PV of owner earnings: $20,610,558
Residual Value
Owner Earnings in year 10 $ 3,146,932
Second Stage Growth Rate (g) (add) 0.50%
Owner Earnings in year 11 $ 3,162,667
Capitalization rate (k-g) 6.17%
Value at end of year 10 $ 51,250,478
Present Value of Residual $26,867,933
Intrinsic Value of Company $47,478,491
Shares Outstanding 612,860
Intrinsic Value per Share: $ 77.47
This value seems very realistic, it is about where Valero was trading at in
early August and is very similar to analysts’ estimates. I think Valero could easily
achieve this number and think it is important for us to invest in this company
before more investors realize this difference.
8
Estimates and Analysis
According to the data below, analysts are expecting a median target price
of 74.00 for Valero. This estimate is very similar to the above valuation. The
mean target price for Valero is 66.57, a number that is heavily weighted down by
one analyst who targets Valero at 25.00 (are you kidding me!!!).
PRICE TARGET SUMMARY
Mean Target: 66.57
Median Target: 74.00
High Target: 86.00
Low Target: 25.00
No. of Brokers: 15
As you can see below, when Valero was trading quite high in early
September, analysts were giving a ‘hold’ position for Valero. More recently,
analysts have been upgrading the firm to ‘buy’. This includes Citigroup who in
early September downgraded the firm.
UPGRADES & DOWNGRADES HISTORY
Date Research Firm Action From To
27-Sep-06 Banc of America Sec Upgrade Neutral Buy
27-Sep-06 Citigroup Upgrade Hold Buy
12-Sep-06 Lehman Brothers Downgrade Overweight Equal-weight
6-Sep-06 Citigroup Downgrade Buy Hold
21-Apr-06 Prudential Initiated Overweight
6-Apr-06 Caris & Company Initiated Buy
Furthermore, S&P analysts tout Valero as a ‘strong buy’ at this time with a
target 12-month price of $78.00. They are expecting winter fuel prices to
compensate for the over exaggeration of late summer declines. In addition, they
are expecting further pricing competition which should lead to stronger pricing.
9
Zacks analysts are also giving a ‘buy’ recommendation for Valero. Seven
analysts give a ‘strong buy’ recommendation, but the general consensus is a
‘moderate buy’.
Zacks average brokerage recommendation is Moderate Buy.
Most other analysts are giving a ‘buy’ recommendation for Valero as well.
As you can tell, a vast majority of analysts agree with my valuation above and
see Valero has a strong company who should its stock price rise.
Investment Rationale / Risk
The competition in the Energy sector is very intense, this can lead to
decreasing prices and decreasing income. However, this can often lead
to increased prices and even push competitors out of business and help
Valero in the long-run.
Other sources of energy may become more prevalent in the future. This
could lead to a decrease in the need of many of the products produced by
Valero. However, Valero seems to have diversified itself quite well and
should be able to cope with this.
Valero pays a very nominal dividend. However, I believe this is due to the
fact that Valero thinks it can better invest its earnings than investors. Also,
this could mean that the company has lots of growth potential.
Yahoo! Finance analysts are projecting negative earnings per share
growth for Valero over the next year. 2006 has been a great year for
energy companies and will likely be hard to beat, but analysts are
predicting positive growth over the next five years per annum.
10
Conclusion
Valero is obviously a very strong company with remaining growth
potential. The company has received numerous awards and has created an
atmosphere where employees truly enjoy working.
Valero has very strong financials and would fit into our fund very well. The
company has large earnings per share and a low P/E Ratio. Additionally,
considerable growth is expected over the next five years.
Valero’s stock has had much success in the past, but has declined
recently. I believe now is the time to buy into Valero because there is no real
reason for such a strong company to have fallen as fast as it has. I agree with
many analysts who say this stock has fallen too far too fast. Moreover, one
analyst cites that the market has over exaggerated the long term implications of a
temporarily weak refining outlook. Valero is a steal at the current price it is
trading and could jump back up to the $70 range in a matter of weeks. If we
don’t buy Valero now, we could be missing out on a huge potential gain.
Because our fund has only a small cash reserve at this time, I recommend
selling Exelon (EXC) or Transocean (RIG) to buy Valero. My reason for
choosing Exelon is because we have realized a very substantial gain in this stock
and now might be a time to take our earnings. We almost might replace
Transocean with Valero because I feel that Valero is a far better investment at
this time. Even if we do not decide to sell Exelon or Transocean, Valero would
still be a very strong investment at this time.
11
Limit Rationale
I chose a take profit price of $78 because this is the intrinsic value I
derived and that number is very close to analyst estimates. If and when Valero
achieves this stock price, we would realize a gain of over $1000. I chose a stop
loss price of $46 because this is Valero’s 52-week low and would prevent us from
losing too much capital. However, I think the odds of Valero tumbling this low are
very minimal.
12
