Oil and gas company Valero Energy Corporation (VLO) continued its business momentum, as evidenced by its solid results for the third quarter of fiscal 2022. The company’s revenues increased 50.6% year-over-year, while net income attributable to VLO stockholders grew 508.4%.

Joe Gorder, VLO’s Chairman, and CEO, said, “Refining fundamentals remain strong as product demand through our system has surpassed 2019 levels, while global product supply remains constrained due to capacity reductions and high natural gas prices in Europe are setting a higher floor on margins.”

Moreover, the company’s strong balance sheet remains the cornerstone of its capital allocation framework. On September 26, VLO announced that it had reduced its debt by approximately $1.25 billion through its previously announced tender offers for various senior notes. The company also declared a collective debt reduction of about $3.60 billion through transactions in the second half of 2021 and the first half of 2022.

Furthermore, tight supply and sustained energy demand are expected to keep energy prices high through 2023, boosting VLO’s earnings and profit margins. The European Union is preparing to implement an oil import embargo on Russian crude oil next month and fuels two months later. According to OPEC, the EU embargo might create “additional energy-supply disruptions.”

At the same time, with the G7 price cap coming into effect on December 5, problems are expected to escalate on the supply side. Given these uncertainties, options traders expect crude oil to reach $200 per barrel next year.

Shares of VLO have gained 78.8% year-to-date and 87.8% over the past year to close the last trading session at $137.91.

Here is what could influence VLO’s performance in the upcoming months:

Solid Financials

In the fiscal 2022 third quarter ended September 30, 2022, VLO’s revenues increased 50.6% year-over-year to $44.45 billion. Its operating income grew 447.2% year-over-year to $3.79 billion. The company's income before income tax expense amounted to $3.73 billion, up 550.6% year-over-year.

Furthermore, net income attributable to VLO stockholders and earnings per common share came in at $2.82 billion and $7.19, registering increases of 508.4% and 536.3% from the prior-year period, respectively.

Favorable Analyst Estimates

Analysts expect VLO’s revenue for the fiscal 2022 fourth quarter (ending December 31, 2022) to come in at $43.75 billion, representing an increase of 21.9% year-over-year. The consensus EPS estimate of $6.86 for the ongoing quarter indicates a 177.8% year-over-year increase. The company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

In addition, the company’s revenue and EPS for the current fiscal year are expected to rise 55.8% and 883% from the previous year to $177.60 billion and $27.62, respectively.

Attractive Shareholder Returns

On October 26, VLO announced a regular quarterly dividend on the common stock of $0.98 per share, payable to shareholders on December 8. It pays a $3.92 per share dividend annually, which translates to a 2.89% yield on the current price. Its four-year dividend yield is 5.09%. 

Its dividend payouts have grown at a CAGR of 2.9% over the past three years and at a 7% CAGR over the past five years.

Mixed Profitability

VLO’s trailing-12-month gross profit margin of 9.94% is 75.9% lower than the 41.19% industry average. Its trailing-12-month EBITDA margin of 9.35% is 68.5% lower than the 29.67% industry average. Likewise, the stock’s trailing-12-month net income margin of 5.71% compares with the industry average of 11.38%.

However, VLO’s trailing-12-month ROCE, ROTC, and ROTA of 47.68%, 23.96%, and 15.88% compare to the industry averages of 20.68%, 8.28%, and 6.88%, respectively. The stock’s trailing-12-month asset turnover ratio of 2.90% is 359% higher than the industry average of 0.63%.

Discounted Valuation

In terms of forward non-GAAP P/E, VLO is currently trading at 4.91x, 38.4% lower than the industry average of 7.97x. The stock’s forward EV/Sales of 0.35x is 83.2% lower than the industry average of 2.11x. Also, its forward EV/EBITDA of 3.78x compares to the 5.77x industry average.

Furthermore, VLO’s forward Price/Sales multiple of 0.29 compares with the industry average of 1.49. The stock’s forward Price/Cash Flow of 4.10x is 7% lower than the 4.41x industry average.

POWR Ratings Show Promise

VLO has an overall rating of A, equating to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. It has a grade of A for Momentum. This is justified as the stock is currently trading above its 50-day and 200-day moving averages of $118.54 and $110.76, respectively.

In addition, the stock has a B grade for Value, consistent with its lower-than-industry valuation metrics.

VLO is ranked #3 out of 94 stocks in the B-rated Energy-Oil & Gas industry.

Beyond what I have stated above, we have also given VLO grades for Sentiment, Growth, Quality, and Stability. Get access to all VLO ratings here.

Bottom Line

VLO’s revenue and EPS have increased at CAGRs of 16.8% and 61.5% over the past three years, respectively. Moreover, the company is poised to benefit from its strategic developments, sustained energy demand, and high energy prices.

The company refinery optimization projects are progressing on schedule and might reduce costs and improve margins. The Port Arthur Coker project, expected to be completed in the first half of 2023, will increase the refinery’s throughput capacity. Also, the DGD project adjacent to the Port Arthur refinery, currently in the start-up process, is expected to have a renewable diesel production capacity of 470 million gallons per year.

Given VLO’s promising growth prospects, low valuation, attractive dividends, and solid momentum, we think it could be wise to invest in this stock now.

How Does Valero Energy Corporation (VLO) Stack up Against Its Peers?

VLO has an overall POWR Rating of A. One could also check out these other stocks within the Energy-Oil & Gas industry with an A (Strong Buy) rating: Marathon Petroleum Corp. (MPC), PBF Energy Inc. (PBF), and Adams Resources & Energy, Inc. (AE).

VLO shares fell $0.70 (-0.51%) in premarket trading Friday. Year-to-date, VLO has gained 90.19%, versus a -16.03% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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