Should I Do It? Tracking Valero

Valero Energy(VLO Quote) is the nation's largest independent petroleum refiner, with about 15% market share and a network of 5,000 gasoline stations. The stock has rallied 9% year to date, closing Tuesday at $55.30 a share, though it is currently valued at just eight times expected full-year earnings of $7.02.

The company posted better-than-expected fourth-quarter results Feb. 1, as it benefited from lower energy prices. Valero earned $1.59 a share, which was a full 16% ahead of the consensus analyst estimate. Even so, profit declined year over year for the first quarter since 2002, and management guided for a further 15% annual earnings decline in 2007.

At these levels, the stock remains 21% below its 52-week high, and I'm here to answer readers' questions. Should I do it? Does Valero have the fuel to keep rallying, or is the stock a value trap in disguise?

After building up the company through more than a dozen acquisitions in recent years, including the $11 billion 2005 purchase of Connecticut-based refiner Premcor, management discussed a change in strategy on the post-earnings conference call. By upgrading its 18 refining plants, Valero believes it can unlock $1 billion of annual earnings leverage. The company has also hired an investment bank to explore strategic alternatives for its Lima, Ohio, location.

The days of $3-a-gallon gasoline seems like an eternity ago, and, in fact, the average national price is down 30% from its peak last August. That said, I believe that with Valero's efficiency measures it will continue to generate solid profits over the next several quarters.