Decades-old Valero Energy Corporation (VLO) recently decided to expand its production capacity, apprehending increased demand for motor fuels. The company announced that it would operate seven U.S. Gulf Coast refineries, up to 95%, in the 2022 fourth quarter.

Moreover, VLO beat its revenue estimates by 7.3% and EPS estimates by 2.9% in its 2022 third quarter. Joe Gorder, VLO’s Chairman and CEO, said, “We continue to maximize refining utilization in a safe, reliable and environmentally responsible manner to provide essential products.”

Furthermore, several analysts upgraded the stock in the recent past. Barclays PLC (BCS) upgraded VLO from $134.00 to $138.00, and Morgan Stanley (MS) increased their price target on VLO from $125.00 to $140.00.

VLO has gained marginally over the past month to close the last trading session at $127.07. It has gained 69.2% year-to-date and 78.5% over the past year. VLO demonstrated solid momentum this year, despite the broader market sell-off. It is trading above the 50-day and 200-day moving averages of $124.51 and $113.36, respectively.

Moreover, Wall Street analysts expect the stock to hit $150.30, indicating a potential upside of 18.3%.

Here is what could shape VLO’s performance in the near term:

Solid Financials

VLO’s revenues came in at $44.45 billion for the third quarter that ended September 30, 2022, up 50.6% year-over-year. Its operating income came in at $3.79 billion, up 447.2% year-over-year. Also, its adjusted net income came in at $2.80 billion, up 413% year-over-year, and its adjusted EPS came in at $7.14, up 436.8% year-over-year.

Attractive Valuations

VLO’s forward EV/Sales of 0.33x is 83.2% lower than the industry average of 1.96x. Its forward EV/EBITDA of 3.40x is 37.4% lower than the industry average of 5.42x. Moreover, its forward Price/Sales of 0.28x is 80% lower than the industry average of 1.38x, while its forward Price/Cash Flow of 3.75x is 11.8% lower than the industry average of 4.25x.

Favorable Analyst Expectations

VLO’s revenue is expected to increase 19.6% year-over-year to $42.95 billion for the quarter ending December 2022 and 53.6% year-over-year to $175.12 billion in 2022. Its EPS is expected to increase 185.8% year-over-year to $7.06 for the quarter ending December 2022 and 871.2% year-over-year to $27.29 in 2022.

In addition, its EPS is estimated to increase by 51.4% per annum for the next five years. It surpassed EPS estimates in all four trailing quarters.

POWR Ratings Reflect Promising Outlook

VLO has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. VLO has an A grade for Momentum. This is justified as the stock is trading above its 50-day and 200-day moving averages.

VLO has a B grade for Growth and Value, in sync with its solid financials in the latest reported quarter and lower-than-industry valuation multiples, respectively.

In the 92-stock Energy – Oil & Gas industry, VLO is ranked #6. The industry is rated B.

Click here for the additional POWR Ratings for VLO (Stability, Sentiment, Quality).

View all the top stocks in the Energy – Oil & Gas industry here.

Bottom Line

VLO’s fundamentals appear rock-solid. Moreover, its dividend payouts have increased at a 7% CAGR over the past five years. Its current dividend yield is 3.08%, while its four-year average yield is 5.08%. And given bullish analysts’ sentiments around the stock, I think VLO might be an ideal buy.

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

While VLO has an overall POWR Rating of A, one might consider looking at its industry peers, PrimeEnergy Resources Corporation (PNRG), Marathon Petroleum Corporation (MPC), and Berry Corporation (BRY), which also have an overall A (Strong Buy) rating.

VLO shares rose $1.23 (+0.97%) in premarket trading Monday. Year-to-date, VLO has gained 75.24%, versus a -13.34% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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