Near All-Time Highs, This Stock is Still Cheap

Green energy may be the way of the future.

But we’ll need fossil fuels to get there.

Financial pros made Valero (VLO) their top oil & gas refiner search over the last month, according to our TrackStar data.

This well-known energy player trades at just 4x cash and pays a 2.9% dividend yield.

Even near all-time highs, this stock is extremely cheap, and here’s why.

Valero’s Business

The energy supply chain divides into three segments: exploration & production (E&P), transportation, and refining & marketing.

E&P companies live and die by the price of oil and natural gas.

Transportation companies don’t care about the price of the commodity, just the volume moved.

Refining & marketing companies look at the ‘crack spread.’ This is the difference between the cost of the commodity and the price they get at the pump less their refining costs.

Generally, higher energy prices benefit refiners, though not as directly as E&P companies.

Valero is the largest independent refiner in North America with 15 refineries capable of producing 3.2 million barrels a day. Plus, they operate a network of over 7,000 retail and wholesale branded outlets.

Source: Valero Investor Relations

Nearly all of Valero’s revenue comes from refining & marketing, though ethanol and renewable diesel are growing quickly.

Financials

Source: Stock Analysis

Valero’s revenues and margins grew spectacularly in the last few years thanks to higher commodity prices which translated into higher fuel prices.

Gross margins are nearly double what they were prepandemic, while free cash flow has nearly tripled.

Total debt at $11.4 billion is down from $15.8 billion during the pandemic and now in line with historical norms.

Besides its healthy dividend, Valero has bought back shares reducing the total outstanding from 409.2 million in 2021 to 340.5 million as of the last report.

Valuation

Source: Seeking Alpha

As a whole, refiners are cheap.

Marathon Petroleum (MPC) has the most expensive P/E ratio at 11.7x, barely above Valero’s 10.0x.

Sunoco’s (SUN) 15.3x cash is about 4x more expensive than Valero’s. However, PBF Energy (PBF) trades at just 3.0x cash and MPC at 3.6x cash.

Even if you look at the price to free-cash-flow, which removes Capex, Valero only trades at 4.6x FCF.

That’s effectively +20% return per year if nothing changes.

Growth

Source: Seeking Alpha

Revenue growth slid this year. However, that was bound to happen after tremendous gains since the pandemic. That pullback flowed through to all other profitability metrics for nearly every refiner.

Yet, the three and five-year CAGR for EBITDA is simply stunning.

Profitability

Source: Seeking Alpha

Now, Valero doesn’t have the best gross margins. But it’s close to the top regarding EBIT, net income, and free cash flow margin.

That’s why you see its returns on equity, assets, and total capital at or near the top of the group.

Our Opinion 10/10

Short of a collapse in the energy market, Valero is well-positioned to generate oodles of cash for shareholders over the next several years.

Yes, it’s near all-time highs. But at 4.6x free-cash-flow, that’s sort of a moot point.