Rising global demand for oil and gas, boosted by the reopening of the Chinese economy and constrained supplies amid geopolitical tensions, could surge oil prices in upcoming months. Given this backdrop, let us look at the energy stock Valero Energy Corporation (VLO), which could be a wise choice for investors due to the reasons explained throughout the article.
Although the overall economy was marred by macroeconomic headwinds last year, the energy sector performed relatively well, with big oil companies reporting the largest-ever annual profits for 2022.
The International Energy Agency (IEA) projects a supply crunch and record levels of global demand, driven mainly by Chinese demand. In addition, Russia’s oil production cuts and record-high U.S. exports to Europe could propel energy prices further.
Such tailwinds could be a boon for the entire energy sector. Against this backdrop, powerful energy stock VLO, with major upside potential, might be a wise portfolio addition now.
VLO manufactures and markets petroleum-based and low-carbon liquid transportation fuels and petrochemical products. The company operates in three segments: Refining; Renewable Diesel; and Ethanol.
The stock has gained 30.4% and 35.6% over the past six months and the past year, respectively, to close the last trading session at $131.88. VLO’s stock is trading above its 200-day moving average of $122.60. Wall Street analysts expect the stock to reach $161.67 in the upcoming 12 months, indicating a potential upside of 22.6%.
Here are the factors that could influence VLO’s performance in the upcoming months:
Solid Financials
VLO’s revenues increased 16.3% year-over-year to $41.75 billion in the fiscal 2022 fourth quarter (ended December 31, 2022). Its operating income improved 169.4% year-over-year to $4.29 billion during the same period. Adjusted net income attributable to VLO and adjusted earnings per share came in at $3.23 billion and $8.45, up 226.6% and 250.6% year-over-year, respectively.
Robust Profitability
VLO’s trailing-12-month ROCE, ROTC, and ROTA of 54.70%, 27.04%, and 18.90% are 155.1%, 172.8%, and 142% higher than the industry averages of 21.44%, 9.91%, and 7.81%, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, VLO is currently trading at 5.75x, 27.8% lower than the industry average of 7.97x. The stock’s forward EV/Sales and EV/EBITDA of 0.37x and 4.15x are 78.5% and 12.1% lower than the industry averages of 1.72 and 4.72, respectively.
Attractive Dividend
On March 16, VLO paid a quarterly dividend of $1.02 per share, representing an increase of 4.1% from the last quarter. This raises the annualized dividend rate on VLO’s common stock to $4.08 per share, which yields 3.16% on prevailing prices. Its dividend has grown at a 2.5% CAGR over the past three years and a 6.4% CAGR over the past five years.
POWR Ratings Reflect Promising Prospects
VLO’s POWR Ratings reflect its strong fundaments. Its overall B rating translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Our proprietary rating system also evaluates each stock based on eight distinct categories. VLO has an A grade for Momentum, in sync with the stock’s impressive price action.
It has a B grade for Growth and Value, consistent with its solid financial growth in the last reported quarter and discounted valuation. In addition, the B grade for Quality is in sync with its robust profitability.
VLO ranks #5 of 90 stocks in the B-rated Energy – Oil & Gas industry.
Click here to see the other ratings of VLO for Stability and Sentiment.
View all the top stocks in the Energy – Oil & Gas industry here.
Bottom Line
In addition to the numerous tailwinds driving the global demand for oil and gas, VLO’s strong fundamentals and unmatched execution to meet the soaring demand keep it well-positioned in the upcoming quarters. Analysts expect its EPS for the fiscal first quarter (ending March 2023) to increase 182.8% year-over-year to $6.53.
In addition to capitalizing on the current oil market dynamics, investors could ensure a stable passive income based on VLO’s reliable dividend payments.
How Does Valero Energy Corp. (VLO) Stack up Against Its Peers?
While VLO has been rated B, equating to Buy, one can check out the other stocks within the Energy- Oil & Gas industry with an A (Strong Buy) rating: Marathon Petroleum Corporation (MPC), PrimeEnergy Resources Corporation (PNRG), and Weatherford International PLC (WFRD).
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VLO shares were trading at $136.67 per share on Tuesday morning, up $4.79 (+3.63%). Year-to-date, VLO has gained 8.52%, versus a 3.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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