Insane Valuation Case Study: Valero Energy
filed in energy on Oct 28, 2008
It is pretty easy to find ridiculously low stock valuations in today’s market, but here’s an example of the value present in the current bear market. Valero Energy (VLO) this morning reported third quarter earnings of $1.86 per share, well above estimates. The stock closed yesterday at $15 per share, which gives it a P/E ratio of 8 based solely on one quarter’s worth of earnings! Insane.
Full Disclosure: Peridot was long VLO at the time of writing, but positions may change at any time
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October 28th, 2008 on 6:51 pm
Chad,
I don’t follow refiners, so I don’t invest in them, but what could possibly hurt the earnings there?Don’t refiners, in a rather broad sense, earn more as the price of oil drops and vice versa? Just curious.
shepherd.
October 29th, 2008 on 5:03 am
The main two components of refiner profitability are end consumer demand and input costs. The lower gaasoline prices are, the higher the demand, and the better pricing power they have. Since refiners are highly capital intensive, input costs of refining crude also play a large role. Input costs are very volatile, hence the dramatic quarterly changes in refiner’s results.
October 29th, 2008 on 8:35 am
Well there must be another crucial component as we can see VLO dropping way faster than the oil prices…
October 29th, 2008 on 7:55 pm
Thanks for the answer, I think the previous comment expresses one sort of sentiment that value investors have to ignore in times like these. It’s incorrect to assume there must be a rational reason for the rise or fall of a stock in a time like this. There may be, but not necessarily so. The more likely scenario is that with so many people dumping their funds willy-nilly, there are some real pricing inefficiencies out there. I’m hoping for you that VLO is one of ‘em.
October 30th, 2008 on 5:18 am
Could not have said it better myself, shepherd.
October 30th, 2008 on 8:37 am
Do you think that run-rate annual EPS of $6.00 per share is really achievable? This seems above that of even the most optimistic analysts. I realize that sell-side research is to be taken with a grain of salt, but headwinds in the refining market seem to point to a more extended down cycle. Gasoline crack has fallen to negative at the beginning of this quarter. And, many believe that distillate margins will soon follow suit. Lower oil prices should help minimize the length of any contraction, but is there downside potential in VLO assuming a fall to a run-rate annual EPS more in the $4.00/share range? Do you believe that VLO offers a truly good margin of safety at these levels given potential for ongoing challenges in the refining industry.
October 30th, 2008 on 8:53 am
Dan,
I’m not going to insist predicting normalized earnings for refiners is an easy task, especially in today’s energy markets. I think $8 in VLO earnings (the peak) is too high. I agree with you that a $4 run-rate in these times is very reasonable (you’ll notice I picked $6 EPS as normalized, right in the middle). But even if VLO can only earn $4, how much downside could there be (in a rational market over the long term) when the stock trades at $17 today and tangible book value is all the way up at $27? I like the risk/reward trade-off, personally.
December 23rd, 2008 on 8:21 pm
[...] we’re looking for is satisfactory margin of safety. On a final note, I have to give credit to Chad Brand at Peridot Capitalist for getting me interested in this [...]
December 24th, 2008 on 4:55 am
[...] we’re looking for is satisfactory margin of safety. On a final note, I have to give credit to Chad Brand at Peridot Capitalist for getting me interested in this [...]
December 24th, 2008 on 7:13 am
[...] we’re looking for is satisfactory margin of safety. On a final note, I have to give credit to Chad Brand at Peridot Capitalist for getting me interested in this [...]
December 24th, 2008 on 7:38 am
[...] we’re looking for is satisfactory margin of safety. On a final note, I have to give credit to Chad Brand at Peridot Capitalist for getting me interested in this [...]
December 24th, 2008 on 7:39 am
[...] we’re looking for is satisfactory margin of safety. On a final note, I have to give credit to Chad Brand at Peridot Capitalist for getting me interested in this [...]