Thursday, June 9, 2016

Valero's Earnings Miss Creates a Buying Opportunity

This investment has risk.  It's certainly not for everyone.  Please talk to a professional before doing anything.  And, perhaps most importantly, I could be wrong.

     According to the website, there are 29 companies in the oil and gas refining industry.  Valero is the second largest.  They are the third cheapest by current PE and fourth cheapest by future PE.  Not only is the company cheap from a value perspective, they are trading near the bottom of their 1-year range:

Everything Looked Good in their 2015 Annual Report

     The balance indicates the company is conservatively managed.  Over the last 5 years, they increased their current ratio from 1.54 to 2.03 and quick ratio .78 to 1.2.  Accounts receivable has decreased from $8.7 billion in 2011 to $4 billion in 2015, which decreased AR from 20% of assets to 10%.  This indicates the company is not extending credit to bolster sales – a very prudent development in the current low oil price market.  Inventory as a percentage of assets fluctuated between 13-14%, indicating the company is handling the slowdown well.  And total cash increased from $1 billion to $4 billion over the last 5 years. 

    Their cash flow statement is also impressive.  Since 2011, cash from operations has fluctuated between $4 and $5.6 billion.  This is more than adequate to cover their net investments in property, which have varied between $1.4 billion and $2.9 billion over the same period.  The difference between the two has left adequate capital for a stock buyback and dividend payment program (see below). 

    While revenue dropped 33% in 2015, COGS dropped 37%, leading to an increase in net income.  This was reflected on their cash flow statement. 

1Q2016 10-Q: An Earnings Miss Creates a Buying Catalyst

     Unlike the favorable revenue/cost effects in fiscal 2015, VLO had a bad first quarter.  From the 10-Q:

In the first quarter of 2016, we reported net income attributable to Valero stockholders of $495 million, or $1.05 per share (assuming dilution), compared to $964 million, or $1.87 per share (assuming dilution), in the first quarter of 2015.
The $946 million decrease in refining segment operating income in the first quarter of 2016 compared to the first quarter of 2015 was due primarily to lower margins on refined products and lower discounts on light sweet and sour crude oils relative to Brent crude oil, partially offset by higher margins on other refined products (e.g., petroleum coke, propane, and sulfur). Our ethanol segment operating income decreased $3 million in the first quarter of 2016 compared to the first quarter of 2015 due primarily to lower ethanol margins that resulted from lower ethanol prices.

These poor results create a buying opportunity.  And the future looks brighter than implied by the latest quarterly results.  Crack spreads are increasing, meaning the company should see an uptick in revenue and profit.  Increasing oil prices should increase VLOs sales amount.  Finally, the summer driving season should mean an increase in overall demand.

    Best of all, the company has a buyback plan and high dividend.  Over the last year, the company authorized a $2.5 billion buyback plan, on which $1.3 billion is outstanding.  They are paying a healthy 4.31% dividend that has a very small payout ratio of 26%.   Both the buyback plan and high dividend should put a floor underneath the stock. 
 Financial Data is From