28 diciembre 2006

Valero Energy: Unbelievable value for 2007

Valero Energy (NYSE: VLO) This is an unbelievable value in my opinion, and even more incredible because it has been hiding in plain sight. This stock has gotten some attention because it has a P/E of 5.8. That will get a lot of people's attention. But the metrics for this company are amazing, top to bottom. I have been discussing low P/S ratios in this story and for VLO the figure is 0.39. Yesterday this stock closed at $52.01. That means if the price tripled, to $156.03, yes tripled!, the P/S would only be 1.17 which is very very low. Try finding any other large cap companies with that low a P/E and P/S. There are not many, and they are usually stocks of companies that are out of favor, and deserve to be.

There is much more to the story. The book value, a favorite of Graham and Buffett, is 1.83. Well, it is not less than 1.0, which is what they would be looking for. But consider this: VLO has hard assets like refineries and land, whose book value has to be tremendously understated, since they are all old ledger entries. That tells me the 'real' book value is far greater than it would be if the company's assets were re-appraised to current value -- meaning that 1.83 might very well approach 1.0.

What's more, management is doing a great job with company resources, as indicated by the ROE of 32.54, ROA of 14.44 and a ROIC of 23.13. To find any negatives I have to struggle. Maybe I could complain because the dividend is only a paltry 62 cents per share, or maybe I should worry that oil prices will crash (I do not think so), or maybe profit margins could be higher -- they could be. As an architect I can tell you that getting a building permit for an oil refinery is about as complex as solving our problems in Iraq and far more time consuming. So if you want a stock that has all the upside potential in the world, and what appears to be strong downside protection, take a look at Valero Energy.

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