As the world moves towards greener energy solutions, ethanol emerges as a promising alternative to gasoline due to its cleaner combustion. Ethanol’s versatility extends beyond traditional green sources like solar panels, finding utility in commercial turbine engine fuels and contributing to the broader biofuel segment. The recent unveiling of the world’s inaugural ethanol-to-jet commercial fuel center in Georgia by the Department of Energy has heightened anticipation in the industry, particularly as airlines face scrutiny over carbon dioxide emissions.
Simultaneously, rising oil prices, buoyed by an optimistic forecast from the International Energy Agency (IEA), have provided a favorable backdrop for fuel refiner Valero Energy (NYSE:VLO). With a remarkable year-to-date surge of 30.8%, surpassing both the S&P 500 Index and the S&P 500 Energy Sector SPDR, questions arise regarding the stock’s valuation amidst its impressive performance.
Valero Energy Corp., headquartered in San Antonio, operates in downstream petroleum, encompassing the production and transportation of fuels and petrochemical products across the U.S., UK, Ireland, and Canada. Established in 1980 as Valero Refining and Marketing Company, it rebranded as Valero Energy Corp. in 1997. Operating through key segments of Refining, Ethanol, and Renewable Diesel, the company reported robust fourth-quarter results, with earnings exceeding estimates at $3.55 per share, though revenue fell short.
Notably, Valero witnessed a substantial surge in ethanol operating income from $7 million in the fourth quarter of 2022 to $190 million in the same period of 2023, attributed to heightened production levels and a concurrent drop in corn prices. With first-quarter 2024 results slated for April 25, market observers scrutinize whether Valero’s exceptional growth is sustainable.
Assessing Valero Energy’s current valuation, its forward price/earnings ratio of 10.89 and forward price/sales ratio of 0.43 suggest the stock retains relative affordability. In comparison, its five-year average forward P/E stands significantly higher at 48.43, with the energy sector median at 11.30. Similarly, Valero’s price/sales ratio presents favorably against the energy sector median of 1.48. Additionally, Valero offers an appealing dividend yield of 2.50%, supported by a modest payout ratio of 16%.
Market analysts maintain a bullish outlook on VLO, upgrading its consensus rating to “Strong Buy” from “Moderate Buy” in recent months. Among 16 analysts covering the stock, 13 advocate a “Strong Buy,” while two recommend a “Hold,” and one suggests a “Strong Sell.” Despite surpassing its mean price target of $151.20, a Street-high target of $177 indicates a potential upside of approximately 5% from current levels.
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Author Faith Yakubu 
