Here’s Why Financial Pros Love Valero

Oil refiners typically don’t care about the price of oil.

But Valero managed to capitalize on short-term volatility to increase revenues 55% in 2022 WHILE expanding margins.

That gave the company its most profitable year in a very long time.

Financial pros took notice, making it the top refining and marketing oil stock by a mile over the last several months.

And once we walk you through our analysis, you’ll understand why.

Valero’s Business

As a crude refiner and marketer, Valero buys oil, refines it, and then sells it at its gas stations or to other companies.

The company capitalized on higher oil prices by increasing its sales prices faster.

Valero is focused on both improving its margins as well as expanding its role into carbon reduction projects.

Source: Valero May 2023 Investor Presentation

In fact, the company plans to keep spending over 40% of growth capital on low-carbon growth projects in 2023. Diamond Green Diesel (renewable diesel) already makes up 6.4% of total revenues and 14.7% of operating income.

Financials

Source: Stock Analysis

As noted earlier, margins improved with sales prices increasing faster than input costs. That directly flowed to the bottom line.

With net debt down to $6.3 billion, the lowest levels since 2018, Valero is in a great position to invest capital in expansion and margin improvement measures.

Valuation

Source: Stock Analysis

Most oil refiners trade at decent price-to-earnings multiples.

But what really matters is the price-to-cash flow.

Marathon Petroleum (MPC), Delek (DK), and NGL Energy Partners (NGL) all trade far below VLO and Phillips 66 (PSX) price-to-cash multiples.

However, VLO trades at the next to lowest EV/Sales and EV/EBITDA ratios.

Growth

Source: Seeking Alpha

Many of the refiners are coming off a stellar 2022. With oil prices stabilizing , forward revenue growth is far more tepid.

But, if we look back at the performance over the last few years, VLO did an excellent job in average revenue, EBITDA, and EPS growth as well as free-cash-flow.

Profitability

Source: Seeking Alpha

Gross margins are high across the industry. However, they’re expected to contract some in the coming quarters.

While VLO doesn’t have the best net income margin, its free-cash-flow margin is the second best on the table to MPC.

Our Opinion 8/10

Trading at just 4.2x operating cash and ~20x free-cash-flow, Valero is a great company in the right sector.

It becomes overvalued if we get a recession that yanks back on demand. However, short of a huge problem in the U.S. or China, we don’t see gasoline purchases dropping by much.

With the recent runup, we’d wait for a pullback towards $120. But make no mistake, VLO is a great stock.

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