Jensen: These Two Refiners Hold Value
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It looks like it will be an ugly start to the week, as the market focuses back onto the intractable problems of Spain and Europe. If we do see a substantial selloff, I plan to add to my positions in the refinery sector. I first outlined my reasons for believing the refiners were deeply undervalued back in a late April column. Since then, all of those selections have easily outperformed the overall market.
- The stock is selling near the bottom of its five-year valuation range based on P/B, P/E, P/CF and P/S.
- VLO yields 2.3% and Evan Calio at Morgan Stanley believes it could double its dividend by the end of FY2013, due to its relatively low payout ratio and robust cash flow.
- The stock sports a cheap forward PE below 6, which is a significant discount to its five-year average (10.8). It also sells for less than 4x operating cash flow.
- VLO is starting to get some notice from the analyst community. Dahlman Rose initiated the stock as a Buy in late April, UBS upgraded the shares to a Buy from a Neutral in mid-June and S&P has its highest rating and Credit Suisse has an Outperform rating and a $37 price target on Valero.
- The stock is cheap, trading at just over 7x forward earnings and 89% of book value.
- The company just paid its first dividend since becoming an independent company in July. The stock yields 2.3% and I would look for management to consistently increase the dividend payout in the years ahead.
- Consensus earnings estimates have increased approximately 4% for both fiscal-year 2012 and fiscal-year 2013 over the past two months.
- Analysts are starting to follow Phillips after the spinoff. Oppenheimer initiated coverage on the shares with an Outperform rating and Argus initiated PSX as a Buy in July. S&P and Credit Suisse also have positive ratings on the stock.
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