Companies in the refining sector are doing remarkably well lately, and Valero Energy (VLO) is one of the top players in the space. The stock has gained over 88% in the past year, but valuation is still reasonable in comparison to the market in general and the sector in particular.
Statistical research has proven that quantitative factors such as quality, value, momentum, and relative strength are powerful return drivers for stocks over the long term. Valero stock looks like a strong alternative for investors when considering these variables.
A High Quality Business
Valero Energy is the largest independent refiner in the United States. The company owns 15 refineries with a total capacity of 3.1 million barrels a day across the U.S., Canada, and the UK. The company also owns 11 ethanol plants with a combined capacity of 1.45 billion gallons of ethanol a year. In addition, Valero Energy owns a 68% interest in MLP Valero Energy Partners (VLP).
The company differentiates itself from other industry players thanks to its complex refinery structure allowing the company to use cheaper oil and to process lower-quality feedstock into a high-value product. This is being reflected in superior financial performance for Valero over time.
Valero’s policy is to distribute 40% to 50% of operating cash flows to investors through dividends and buybacks, and shareholders have been compensated with succulent cash payments over the years. From 2011 to the first quarter of 2018, the dividend has increased from $0.3 to $3.2 and the company has reduced the amount of shares outstanding by over 24%.
Valero delivered better than expected financial performance for the first quarter of 2018. Revenue amounted to $26.4 billion during the period, increasing by 21.3% year over year. Adjusted net income was $1.00 per share, an increase of 47%. In addition, the company returned $665 million in cash to stockholders through dividends and stock buybacks in the quarter.
Valero stock trades at very reasonable valuation ratios, and we could even say that the stock is undervalued in comparison to industry peers. The table below shows key valuation ratios for Valero versus other big industry players such as Phillips 66 (PSX), Marathon Petroleum (MPC), and Andeavor (ANDV).
Considering ratios such as price to earnings, forward price to earnings, price to earnings growth, price to sales, price to book value, and dividend yield, Valero is priced near the low end of the spectrum in most of these indicators.
|Ticker||P/E||Fwd P/E||PEG||P/S||P/B||Div Yield|
Since Valero is a top industry player in terms of the quality of its business and long-term financial performance, current valuation ratios look fairly attractive in comparison to other alternatives in the sector.
On The Right Side Of Momentum
Stock prices reflect market expectations to a good degree. When a company is doing better than expected and expectations about future financial performance are also increasing, this can be a powerful upside fuel for the stock.
Valero has reported better than expected earnings numbers over the past 4 consecutive quarters in a row. The bars show the expected earnings number, the actual reported number, and the difference between the two both in absolute and percentage terms.
The chart below shows the stock price in comparison to earnings forecasts for next fiscal year. Unsurprisingly, rising earnings estimates are driving the stock price higher too.
VLO data by YCharts
Outperforming The Market And The Sector
Relative strength tends to be sustained over time. In other words, stocks that are outperforming the market tend to continue doing so over the following months.
Refiners have been doing remarkably well lately, as expressed by a 41.6% return for the VanEck Vectors Oil Refiners ETF (CRAK) in the past year, far surpassing the 13.43% gain produced by the SPDR S&P 500 ETF (SPY) in the same period. Interestingly, Valero has crushed both the market in general and the sector in particular, with an explosive return of 87.64% over the past 12 months. When it comes to relative strength, Valero doesn’t leave much to be desired.
VLO data by YCharts
Putting It All Together
The PowerFactors system is a quantitative investing system available to members in my research service, “The Data Driven Investor.” This system basically ranks companies in a particular universe according to the factors analyzed in this article for Valero: quality, valuation, momentum, and relative strength.
The system has produced solid backtested performance over the long term. The chart below shows how the 50 stocks with the highest PowerFactors ranking in the S&P 500 index performed in comparison to the SPDR S&P 500 ETF since 1999. The backtesting assumes an equal-weighted portfolio, monthly rebalanced, and with an annual expense ratio of 1% to account for trading expenses.
Data from S&P Global via Portfolio123
The system more than doubled the benchmark, with annual returns of 12.89% per year versus an annual return of 6.1% for the ETF in the same period. In cumulative terms, the system gained 948.66% versus 215.05% for the benchmark. Past performance does not guarantee future returns, but it makes sense to expect solid returns when investing in companies with strong quantitative attributes.
Valero is one of the 50 stocks currently picked by the system, which means the company is among the best 10% of those in the S&P 500 based on a combination of quantitative indicators that measure financial quality, valuation, business momentum, and relative strength. The numbers are indicating more upside potential in Valero stock on a forward-looking basis.
Capitalize on the power of data and technology to take the guesswork out of your investment decisions. Statistical research has proven that stocks and ETFs showing certain quantitative attributes tend to outperform the market over the long term. A subscription to The Data Driven Investor provides you access to profitable screeners and live portfolios based on these effective and time-proven return drivers. Forget about opinions and speculation, investing decisions based on cold hard quantitative data can provide you superior returns with lower risk. Click here to get your free trial now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.