As we make a shift to green energy, ethanol (ZKJ24) emerges as a solid option because, unlike gasoline, ethanol burns cleaner. Ethanol also stands out from other green sources like solar panels because of its usage in commercial turbine engine fuels. Its blending nature makes ethanol companies a part of the broader biofuel segment, as well.
In January, the Department of Energy announced the opening of the world’s first ethanol-to-jet commercial fuel center in Georgia. Anticipation surrounding the plant is that it will prove to be a game-changer for ethanol stocks, mainly due to the airline industry facing criticism for its inability to gain control over its carbon dioxide emissions.
Meanwhile, oil prices have also been on the rise, boosted by a bullish forecast from the International Energy Agency (IEA). This fundamental backdrop has been a boon for fuel refiner Valero Energy (VLO) - but after its impressive year-to-date run, is the stock overvalued at current levels, or on track for additional upside?
Valero Energy Stock Outruns the Market
Valero Energy Corp. (VLO) is a San Antonio-based downstream petroleum company, involved in the production and transportation of fuels and petrochemical products. The company operates in the U.S., UK, Ireland, and Canada on a wholesale and bulk basis. Valero operates through three key segments: Refining, Ethanol, and Renewable Diesel. Founded in 1980, it was initially known as Valero Refining and Marketing Company, but changed its name to Valero Energy Corp. in 1997.
VLO stock has surged 30.8% so far this year, easily outpacing both the S&P 500 Index ($SPX) - up 10.5% on the year - and the S&P 500 Energy Sector SPDR (XLE), which has also climbed more than 10%.
Valero reported its Q4 results on Jan. 25, where it posted a profit of $3.55 per share, beating estimates of $2.95, with full-year earnings coming in at $24.92. Q4 revenue of $35.41 billion missed forecasts of $37.11 billion, while full-year revenue landed at $144.77 billion.
The company reported a surge in its ethanol operating income from $7 million in 4Q22 to $190 million in 4Q23. This increase was due to higher production levels, further strengthened by a decline in corn prices during the quarter.
Valero is set to report its first quarter 2024 results on April 25.
Is VLO Fairly Priced?
When a company gains more than 30% in a few short months, investors are bound to wonder if it is overvalued, and whether the rally has any more steam left in it. So, let's take a look at Valero Energy’s current valuation.
If we look at its forward price/earnings ratio of 10.89, and its forward price/sales ratio of 0.43, these measures indicates that the stock is still trading at a relative discount. VLO's 5-year average forward p/e is a much steeper 48.43, and the energy sector median is 11.30. Likewise, Valero's price/sales ratio compares quite favorably to the energy sector median of 1.48.
And on the plus side, VLO also offers a dividend yield of 2.50%, based on the annualized payout of $4.28. With a payout ratio of just 16%, these dividends are well covered by Valero's earnings.
What Do Analysts Expect for VLO Stock?
Analysts are bullish, with a consensus “Strong Buy” rating for VLO - up from “Moderate Buy” two months ago. Among the 16 analysts covering the stock, 13 have a “Strong Buy” rating, 2 have a “Hold” rating, and 1 has a “Strong Sell” rating.
In light of its breakout price action, the stock has outpaced its mean price target of $151.20. However, the Street-high price target of $177 indicates potential upside of about 5% from current levels.
