Diary of a Financier

Valero Energy: Chart of the Day

In Capital Markets on Wed 9 Mar 2011 at 19:12
  • VLO about to test its 23.6% Fibonnaci level at $29.66.
  • Cheap valuation, amazing risk/return, we’re waiting to buy on a breakout

Refiners just need a little bit of stability in oil/gas prices.  First, I have a feeling they’re not going to get it. Second, we’ve at least established a new plateau with WTI Oil (CL/1) above $90.  The latter offers a floor, which can save refiners from the kind of slide that took them from a precipice in 2008, down to their dungeons in late 2009.  The worst part about that slide: even after the broad equity markets bottomed in March 2009, refiners still probed for a lower low.  [To get a feel for that peak-to-trough, take a look at Tesoro (TSO), Valero (VLO), Sunoco (SUN).]

VLO has my attention, however.  Technically, it’s about to re-test its 23.6% Fibonnacci resistance at $29.66, the first stop in a long retracement:

VLO daily- about to test first Fibonnaci resistance again.

The valuation has me really captive, in addition.  The Street was expecting FY2009 EPS of $-1.24, and VLO managed to surprise with an actual of $-0.56.  (Contrast that resilience with TSO, who wasn’t even able to climb into the black through 2010.)  So, VLO trades at ~17x EPS, 1.03x BV, 18% Revenues, 5x Cash Flow.  Hardly any debt and $10.85 cash/share.  Very little debt compared to TSO &  SUN too.

The greatest piece to the puzzle comes from the forward EPS estimates:

At 10x 2011 EPS, the stock is not priced to achieve such EPS growth, and I don’t think the Street expects much from VLO.  Compare the bullish spike in Holly Corp (HOC), which has a more comparable outlook to VLO than SUN/TSO.

A caveat: through the bulk of the last decade, it has hovered around a trailing PE of 10…

Yet, in my analysis, it’s still the relative-strength winner among refiners.  The risk/reward is a value-investor’s dream.  I’ll use a stop at $25, but historical support lies just under $16.  Our upside aligns well with the Fibonnaci levels of $46 or even $75 best-case.  Hence, we’re buying on a breakout.




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