We maintain our Buy recommendation on Valero Energy Corp. (VLO) shares despite the ongoing refining-margin weakness due to high crude oil prices and weak product demand. Valero's second-quarter earnings came weaker-than-expected on the back of reduced margins and throughput volumes, as well as an increase in refinery operating expenses.
We believe that high feedstock and operating costs will continue to weigh on near-term margins. However, our long-term view of the business remains favorable, particularly for Valero, given its complex and geographically diverse refining system. We also like the company's restructuring initiatives and its track record of returning significant capital to shareholders. The recent pullback makes the company's shares even more attractive, in our view.
On July 29, Valero Energy reported second-quarter earnings of $1.37 per share, below our estimate of $2.20 per diluted share and the same quarter a year ago. The year-over-year negative comparison was due to reduced product margins on the back of higher crude oil prices and an increase in refinery operating expenses.
We have reduced our earnings estimates to reflect the quarterly miss and the weak product margins, particularly for gasoline blends. Our new full-year 2008 and 2009 EPS estimates are $4.13 and $5.03, down from $5.74 and $6.43 before, respectively.
While we are cognizant of the headwinds, we cannot close our eyes to the underlying strength of the U.S. refining scene. We believe that independent refining stocks in general have become extremely attractive following the recent weakness. Our new $55 price objective, reduced from $65 before, results from 2009 P/E and P/CF multiples of 10.9x and 8.3x, respectively.
Read the full analyst report on VLO
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