The recent pullback in oil prices from their September 2023 highs has led to a decline in many energy stocks, creating attractive valuations for some. One such stock poised for a potential rally is Valero Energy Corporation (NYSE:VLO), a major player in refining and currently trading at compelling valuations.
Valero, with a market cap of $43 billion, operates in three key segments: Refining, Ethanol, and Renewable Diesel. Notably, the company is directing 40% of its growth capital towards low-carbon projects, emphasizing renewable diesel and sustainable aviation fuel (SAF) as key areas for growth. With the biofuels market expected to surge by 20% by 2027, Valero’s strategic focus aligns with cleaner energy initiatives.
Despite a modest 8% pullback over the past 52 weeks, significantly lagging the broader equities market, Valero’s current valuation suggests it is undervalued. The stock’s forward earnings multiple of 5.19x is well below the energy sector median of 9.64x, and its price/cash flow ratio of 4.02 is a bargain compared to the sector median of 4.56. These multiples are not only lower than Valero’s energy sector peers but also below the stock’s five-year averages, indicating a favorable valuation.
Valero’s Q3 2023 earnings surpassed expectations, with EPS of $7.49, even though revenue fell short of consensus. The company ended the quarter with a strong cash position of $5.8 billion, and its debt-to-capitalization ratio was 17%, reflecting financial stability.
Valero’s commitment to shareholders is evident through its forward dividend yield of 3.23%, exceeding some peers in the energy sector. The company has a history of raising its quarterly dividend for 11 consecutive years, and its annual payout ratio target of 40-50% of adjusted net cash provided by operating activities demonstrates a commitment to returning value to shareholders.
Analysts are optimistic about Valero’s future, setting an average target price of $150.00, suggesting a potential 20% upside from current levels. The consensus rating is a “moderate buy,” with a majority of analysts expressing a positive outlook.
In conclusion, Valero Energy Corporation (NYSE:VLO) stands out as a top value pick in the energy sector, poised for a potential 20% rally. Given its historically low valuations, diverse energy portfolio, and solid cash position, the stock presents an appealing investment opportunity while trading at discounted levels.
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Author Faith Yakubu 
