Valero Energy Corp. Mixed Reaction (VLO)

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Valero Energy Corp. (NYSE:VLO) posted earnings after yesterday’s close.  Profits came in at an all-time high on high oil prices.  The refiner’s net income was over $2.2 Billion with an EPS report of $3.89.  Revenues were lower than the prior year at $24.2 Billion, but that is reflective of refineries being partially closed and from a refinery sale.  The First Call estimate had consensus earnings estimates at $3.76.

Some refinery repairs are ongoing and it is already expected that most refiners aren’t able to operate at 100% capacity right now.  The buybacks continue in the stock as well, with $2 Billion earmarked for share stability and lowering some of its outstanding shares.  Valero’s earnings leave quite a bit of room for improvement in its dividend, particularly if it wants to differentiate itself from an industry that is stingy on using profits to pay out income in the form of dividends.

The research note that stood out the most today, at least so far, was from Goldman Sachs.  The brokerage firm noted that investors should use this pullback as an opportunity to add shares as it looks inexpensive on a historical basis, despite the fact that Goldman had to trim this year EPS estimates from $12.25 down to $10.00 and it trimmed next year EPS targets from $12.50 to $12.00.  If those estimates hold true, the refining giant trades at a mere 6.5-times forward EPS targets and only about 5.4-times next year EPS targets. 

Even if high prices are or aren’t sustainable quite at the current record-high prices, those multiples are pretty hard to argue against for investors seeking value and upside in the energy markets.  Goldman Sachs sees the potential for more than a 50% gain to its target of $105.00 over the next 12-months.

Valero opened slightly to the downside, and shares are now down over 2.5% to $65.20.   Over the last 52-weeks, its shares have traded as low as $46.84 and as high as $78.68.

Jon C. Ogg
August 1, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.