Valero Energy Corporation

Transcription

1 Grade Earnings Last Earnings Release 10/26/2017 Last Qtr. Actual vs. Est. $1.91 / $1.61 Next Release 10/31/2017 $1.82 Year Ending 12/31/2017 $4.99 Quick Facts Dividend Yield 3.22% 52 Wk High $ Wk Low $61.47 Short Interest 4% of float $ /12/2017 Rated 'BUY' since Nov 16th, 2017, when it was upgraded from 'HOLD' Year Ending 12/31/2017 $5.41 Market Cap $38.0B Overview Company Performs Well In Fundamental Analysis MarketGrader currently has a BUY rating on Valero Energy Corporation (VLO), based on a final overall grade of scored by the company's fundamental analysis. scores at the 88th percentile among all 5815 North American equities currently followed by MarketGrader. Our present rating dates to November 16, 2017, when it was upgraded from a HOLD. Relative to the Oil Refining/Marketing sub-industry, which is comprised of 22 companies, 's grade of ranks third. The industry grade leader is Transportadora de Gas del Sur SA Sponsored ADR Class B RegS (TGS) with an overall grade of The stock, up 35.42% in the last six months, has outperformed both the Oil Refining/Marketing group, up 17.79% and the S&P 500 Index, which has returned 9.0% in the same period. Please go to pages two and three of this report for a complete breakdown of VLO's fundamental analysis. Price, Rating and Sentiment History - 2 Years 1

2 Growth B- Value A While Not Entirely Negative, Growth Indicators Show Several Signs of Weakness 's recent jump in quarterly sales was a Market Growth LT D welcome improvement from a recent trend of long term decline. The company booked $23.56 billion in revenue last quarter, 19.91% better Market Growth ST A than the $19.65 billion reported a year ago. By comparison, its $88.30 EPS Growth F billion in 12-month trailing revenue represents a 35.74% decline from the comparable period ended three years ago in which the company had Growth Potential B $ billion in total sales. One or two more quarters of improved results will reverse 's top line growth slide and Earnings Momentum B likely provide a boost to its earnings growth as well. It also reported outstanding profit growth last quarter from the year earlier period, Earnings Surprise B contrasting with a long term decline in full year profits, which we measure over a three year period. It therefore appears that the company is in the process of reversing its long term trend of falling profits. 's Third quarter profit jumped 37.19% to $ million from $ million (excluding extraordinary items) reported in the year earlier period; on the other hand, also including its first quarter results, its 12-month trailing net income dropped 46.13% to $2.06 billion from the $3.83 billion it had earned in the 12 months ended three years earlier. The company reported a significant margin contraction in its latest quarter, extending an ongoing trend; even though the pace of the decline slowed down from the two preceding periods, these results suggest problems with its business model. Its EBITDA, operating and net margins fell an average 20.92% relative to the year earlier period. The company exceeded analyst estimates by an impressive 18.63% with its October 26, 2017 report; however, investor reaction was relatively mild as the stock rose only 0.09% after the announcement, indicating the surprise was already factored into the stock price or the gains came from one-time items. This report continues a remarkable trend of beating analysts' estimates consistently, having exceeded them by an average of 5.71% in the last six reports. The Stock's Valuation is Attractive Based on the Company's Overall Financial Strength 's shares trade currently at times its Capital Structure A- earnings per share in the last 12 months, which represents a 29.61% discount to our "optimum" P/E ratio of This MarketGradercalculated ratio is based on the company's quarterly earnings--in rolling P/E Analysis A- Price/Book Ratio A+ 12-month periods--over the last five years. Accordingly, Valero Energy Corporation's earnings per share have grown at a 18.16% annualized clip Price/Cash Flow Ratio A+ during this time. In order to sustain this growth rate and a high P/E multiple, the company's recent margin contraction must be reversed and Price/Sales Ratio A its overall Profitability grade must show significant improvement soon. The stock also trades at times forward earnings estimates for the Market Value A+ next four quarters, lower than its trailing P/E and the S&P 500 index's forward P/E of By placing a lower multiple on the company's future earnings than it does on the market as a whole, investors may see the company as financially strong but with relatively poor growth prospects. This may offer a valuable opportunity for patient investors willing to wait for future earnings reports. 's current market value is only 2.24 times its tangible book value, which excludes intangible assets such as goodwill. This means investors are currently assigning very little value to the company's ongoing business and its future earnings growth, especially considering that 's intangible assets represent only 16.06% of its total stockholders' equity. Based on the $10.93 in cash flow per share generated by the company in the last twelve months, at the current price of $86.94 the stock trades at 7.95 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its stock price is also 0.43 times its trailing 12-month sales, a 46.89% discount to the Oil Refining/Marketing industry's average price to sales ratio of Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. By this measure is priced very attractively with a total value of $38.04 billion, only 9.45 times higher than its latest quarterly net income plus depreciation. Revenue Qtrly. 09/30/2017 $23.6B Revenue Qtrly. Year Ago $19.6B Revenue 1 Yr. Chg % Revenue 12 Mo. Tr. Latest $88.3B Revenue 12 Mo. Tr. 3Y Ago $137.4B Revenue 12 Mo. Tr. 3Y Chg. (35.74%) Net Income Qtrly. 09/30/2017 $841M Net Income Qtrly. Year Ago $613M Net Income 1 Yr. Chg % Net Income 12 Mo. Tr. Latest $2.1B Net Income 12 Mo. Tr. 3Y Ago $3.8B Net Income 12 Mo. Tr. 3Y Chg. (45.23%) P/E Ratio 12 Mo. Tr. 09/30/ Optimum P/E Ratio Forward P/E Ratio S&P 500 Forward P/E Ratio Price to (Tangible) Book Ratio 2.24 Price-to-Cash Flow Ratio 7.95 Price/Sales Ratio

3 Profitability C Company's Weak Profitability Grades Underscore a Difficult Operating Environment, which barely eked out a profit over the last 12 Asset Utilization B- months, has plenty of weaknesses among its poor profitability indicators, primarily a very mediocre return on equity and below average margins. Capital Utilization C The $2.06 billion in net profits booked by the company in the last 12 Operating Margins C months represent only 2.33% of total sales, while its operating margins in the same period trailed the industry average. The Oil Refining/Marketing Relative Margins D industry's average operating margin of 12.94% is 81.62% higher than the company's 4.06% margin. 's return on equity Return on Equity C deteriorated significantly during the last twelve months to 10.12% from the year earlier period's 10.92%. Although the most recent value is still Quality of Revenues B- acceptable, it underscores a worrisome trend in an indicator MarketGrader considers very important in measuring the company's management's efficiency. This mild slowdown doesn't pose any immediate threats to the health of the company's capital structure, which is very conservatively managed. Its total debt is equal to less than half the firm's total equity, including long term debt that accounts for 29.11% of total capital. 's core operations, as measured by the company's EBITDA, have generated $5.62 billion in earnings over the last twelve months, a modest 2.74% decline from the $5.77 billion earned in the equivalent period ended a year ago. EBITDA is used as a way of measuring core earnings since it includes money earned in its operations such as interest expense, income taxes paid and depreciation and amortization, both of which are non-cash charges. Cash Flow A- Company's Cash Flow Indicators Are Solid Across the Board but Offer Some Room for Improvement 's $1.04 billion in cash flow booked in the latest Cash Flow Growth B+ quarter represents 20.16% growth from the $ million reported last year for the comparable quarter. When compared to the 11.86% increase EBIDTA Margin B- in cash flow in the last twelve months it seems like the rate of growth is Debt/Cash Flow Ratio A+ accelerating, which could have a very positive impact on earnings growth in coming quarters. The company's ability to pay off its debt by simply Interest Cov. Capacity A+ using the cash it generates from operations is excellent, based on last quarter's net debt to EBITDA ratio of This is based on net debt (total Economic Value B debt minus cash on hand) of $3.31 billion and EBITDA of $1.97 billion, giving it plenty of flexibility to reduce leverage or raise additional capital if Retention Rate A+ necessary to pursue new strategic opportunities. And it appears that reducing leverage is what the company has been trying to use its reserves for as cash on hand fell from $5.95 billion a year ago to $5.18 billion last quarter, a 12.99% reduction. But more importantly, during the same period its total debt as a percentage of total capital fell from 30.56% to 29.41%. If this trend continues Valero Energy Corporation will be well positioned for future earnings growth. MarketGrader's Economic Value indicator looks at the company's returns on invested capital after measuring the cost of obtaining it and of keeping investors' capital tied up in its business. In this case, Valero Energy Corporation had $28.73 billion in invested capital as of its most recently reported quarter, on which it generated a 12.46% return based on 12-month trailing operating income. Its total after tax cost of capital was 7.01% during the same period, most of it associated with its weighted cost of equity, which was 5.67% vs. its 1.34% weighted cost of debt. Deducting these costs from the total return on investment translates into 's economic value added (EVA) of 5.45%. While not outstanding, this represents and acceptable true economic profit after accounting for both operating and capital costs. The company increased its quarterly common dividend on September 30, 2017 by 16.67%, to $0.700 cents a share from $0.600 cents. It has paid a dividend for at least 37 years and, based on this latest payout, the stock is currently yielding 3.22%. Valero Energy Corporation paid out a total of $1.21 billion in common dividends during the last 12 months (ended last reported quarter), which accounted for 25.04% of its cash flow and 58.56% of what it earned in the period after taxes. This payout was slightly lower than what it paid out during the 12 months ended just a quarter earlier, or 64.05% of total earnings. Combined with the company's generally healthy fundamentals, the recent reduction alleviates concerns about the company's outlays growing faster than its cash flow, which could damage its balance sheet and contribute to lower overall grades. Cash Flow Qtrly. 09/30/2017 $1B Cash Flow Qtrly Year Ago $863M Cash Flow 1 Yr. Chg % Cash Flow 12 Mo. Tr. Latest $4.8B Cash Flow 12 Mo. Tr. 3Y Ago $5.8B Cash Flow 12 Mo. Tr. 3Y Chg. (16.51%) Free Cash Flow Last Qtr. $696M Economic Value Total Invested Capital $28.9B Return on Inv. Capital 12.46% Weighted Cost of Equity 5.67% Weighted Cost of Debt 1.34% Total Cost of Capital 7.01% Economic Value Added 5.45% 3

4 Profile Valero Energy Corp. engages in manufacturing and marketing of transportation fuels, other petrochemical products and power. It supplies fuel and products to its customers under Valero, Diamond Shamrock, Shamrock, Ultramar and Beacon brands. Valero serves many industries, from healthcare and plastic to transportation, beauty products and manufacturing. The company operates through its three reportable business segments: Refining, Ethanol and Retail. The Refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The Ethanol segment is engaged in the sale of internally produced ethanol and distillers grains. The Retail segment includes company-operated convenience stores, Canadian dealers/jobbers, truckstop facilities, cardlock facilities, and home heating oil operations. The company was founded on January 1, 1980 and is headquartered in San Antonio, TX. Key Facts: One Valero Way San Antonio,TX Phone: Biggest Company in Sub-Industry Phillips 66 (PSX) Grade 37.3 Market Cap:$50.68 billion Smallest Company in Sub-Industry Adams Resources & Energy, Grade 29.9 Market Cap:$ million MarketGrader Dilution Analysis Impact of Change in Shares on EPS - Q Dilution Summary Income Statement Last Qtr (09/2017) 12 Mo. Trailing Revenue $23.6B $88.3B *EPS Latest $1.91 *EPS Year Ago $1.33 EPS Change 1 Yr. 43% C. Shares - Latest(M) 441 C. Shares - Yr Ago(M) 460 C. Shares - 1Yr Chg. (4%) EPS if Yr. Ago Shares $1.83 EPS Chg. if Yr. Ago 37% EPS Loss from Dilution $0.08 *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Op. Income $1.5B $3.6B Net Income $841M $2.1B *EPS $ *Earnings per share are based on fully diluted net income per share excluding extrodinary items. This number may not match the headline number reported by the company. Balance Sheet Total Assets Total Debt Latest $48.0B $8.5B Stockholders Eq. $20.4B All numbers in millions except EPS Ratios Price/Earnings (12 mo. trailing) Price/Tangible Book 2.24 Price/Cash Flow 7.95 Price/Sales 0.43 Debt/Cash Flow Return on Equity 10.12% Gross Margin (12 mo. trailing) 7.14% Total Assets Intangible Assets $48.0B $3.3B '12 '13 '14 '15 '16 '17 Qtr Operating Margin (12 mo. trailing) 4.06% Net Profit Margin (12 mo. trailing) 2.33% Long Term Debt $8.4B Qtr Total Debt Book Value Enterprise Value $8.5B $20.4B $3.3B Qtr Qtr

5 Top Down Analysis Energy Stocks in Sector: 534 Buys: 67 (12.55%) Holds: 63 (11.80%) Sells: 404 (75.66%) No. of stocks at: 52-Wk. High: 7 52-Wk. Low: 47 Above 50 & 200-day MA: 154 Below 50 & 200-day MA: 239 Oil Refining/Marketing Stocks in Sub-Industry: 22 Buys: 5 (22.73%) Holds: 2 (9.09%) Sells: 15 (68.18%) No. of stocks at: 52-Wk. High: 2 52-Wk. Low: 0 Above 50 & 200-day MA: 13 Below 50 & 200-day MA: 6 # Ticker Grade Sentiment Name Price Next EPS 1 NBLX P Noble Midstream Partners LP $ /01/ EQM N EQT Midstream Partners LP $ /01/ RMP N Rice Midstream Partners LP $ /09/ TGS N Transportadora de Gas del Sur SA $ /08/ CRZO N Carrizo Oil & Gas, Inc. $ /27/ PSD.CA N Pulse Seismic Inc. $ /10/ VLP N Valero Energy Partners LP $ /15/ MTDR P Matador Resources Company $ /08/ SRCI N SRC Energy Inc $ /22/ CNNX N CONE Midstream Partners LP $ /03/ VLO P $ /31/2017 # Ticker Grade Sentiment Name Price Next EPS 1 TGS N Transportadora de Gas del Sur SA $ /08/ WGP N Western Gas Equity Partners LP $ /01/ VLO P $ /31/ PBFX N PBF Logistics LP $ /15/ ANDX N Andeavor Logistics LP $ /05/ CVRR P CVR Refining LP $ /02/ MPC P Marathon Petroleum Corporation $ /02/ PBF P PBF Energy, Inc. Class A $ /15/ HFC P HollyFrontier Corporation $ /02/ KEY.CA N Keyera Corp. $ /15/ Price Trend. A+ 2. Price Momentum. B+ 3. Earnings Guidance. B+ 4. Short Interest. A 8.9 Copyright 2010 MarketGrader.com Corp. All rights reserved. Any unauthorized use or disclosure is prohibited. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regards to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. MarketGrader does not make markets in any of the securities mentioned in this report. MarketGrader does not have any investment banking relationships. MarketGrader and its employees may have long/short positions or holdings in the securities or other related investments of companies mentioned herein. Officers or Directors of MarketGrader.com Corp. are not employees of covered companies. MarketGrader or any of its employees do not own shares equal to one percent or more of the company in this report. 5