Use short-sighted momentum sell-off to add to VLO - Goldman Sachs - August 01, 2007
Source of opportunity
We believe investors should use the recent pullback in Valero shares to add to positions, as the shares continue to look very inexpensive to us be it on historical, current year, or out-year earnings estimates. While we admittedly have had to lower our 2007 estimate to reflect the recent pullback in refining margins and have tweaked down our still well above-consensus 2008-2009 forecasts, we believe Valero shares are very inexpensive in the context of our bullish energy sector view. We see 57% upside to an unchanged $105, 12-month target price for Valero.
Catalyst
We believe the key to renewed confidence in Valero and the refining sector is a decline in overall crude oil and product inventories in 3Q and 4Q2007, which should enhance confidence in continued cyclical strength through 2008. We continue to believe the combination of resilient demand, disappointing supply growth, and delays in major Middle East new build projects point to refining margins on average staying well above consensus expectations.
Valuation
Valero currently trades at a P/E of 8.1X 2006 actual results of $8.31, 6.7X our updated 2007 estimate of $10.00 ($12.25 before), 5.6X our revised 2008 forecast of $12.00 ($12.50 before), and 4.8X our updated 2009 projection of $14.00 ($14.50 before). Since 2004, Valero has traded on average at around 9X forward year consensus EPS, suggesting significant upside exists. We see 57% upside to our unchanged $105, 12-month target price (based on asset value, P/E and cash flow valuation analyses).
Key risks
Key risk is a sustained decline in Gulf Coast 3:2:1 (WTI) refining margins to under $8/bbl. |
