We came across a bullish thesis on Valero Energy Corp (VLO) on ValueInvestorsClub by Alejo Velez. In this article, we will summarize the bulls’ thesis on VLO. VLO’s stock was trading at $151 when this thesis was published, vs. a closing price of $137.02 on November 12.
VLO is one of the dominant leaders in the global refining industry which comprises complex refineries in the United States and the United Kingdom. With time, VLO has posted high returns despite the volatility of the oil industry. The company has been compounding at 15.5% annually since its IPO in 1997 and its dividend has grown by 15%, helping shareholders even through downturns.
Recently, the energy sector’s transition to electric vehicles (EVs) threatens to reduce oil demand, with an expected decrease of 30-50% by 2050. Although this has its demerits, VLO has been able to adapt by taking advantage of the growing scarcity of refining capacity around the world.
Giant players such as Shell and BP have reduced the number of refineries, with 4.5 million barrels per day in capacity being shut down between 2020 and 2023. It could also offer the potential for stronger improvement in refining margins than the reductions in demand, which is a favorable picture for VLO’s successful, low-fixed-cost refineries.
VLO’s position as one of the largest global refiners is hard to replicate, as it boasts a high average Nelson Complexity Index (NCI) of 11.8. The replacement cost of the assets of each refinery is incredibly high, and it would cost approximately $70 billion to $118 billion to rebuild VLO’s current assets, emphasizing their substantial intrinsic value.
The company seems undervalued and has an opportunity to generate high double-digit returns in the medium term since its stock is 35% below its fair value. VLO’s dividends and buybacks yielded a total return of about 7.4% per annum, further underlining its friendly shareholder approach.
Risks such as the recent decline in the discount of heavy crude and the escalating pressure on fossil fuels regulation remain. However, a top-tier refiner with good cash flow generation potential like VLO is a good bet. Likewise, the expectations of steady demand for oil, more frequent refinery turn-offs, and slow new capacity are good signals.
While we acknowledge the potential of VLO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than VLO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: Stavros Tousios has no positions in the aforementioned stocks.