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Valero Firming Up: 3rd Place and Rising among Analysts

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Aug. 29 2017, Updated 6:39 a.m. ET

Analyst ratings for Valero

Valero Energy (VLO) has more than 50% “buy” ratings. The analyst rating chart below shows that 11 (52%) of the 21 analysts covering VLO have rated it a “buy.” Another ten analysts have rated Valero as “hold.”

Recently, Jefferies lowered Valero’s target price from $80 per share to $78 per share. VLO’s mean price target of $72 per share implies a ~10% gain from its current price level.

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Why the strengthening of ratings for VLO?

VLO is on a growth path to creating an integrated downstream value chain. Valero intends to focus on refining as well as on its Logistics segment. The company aims to achieve ~$1.2 billion–$1.4 billion in incremental annual EBITDA (earnings before interest, tax, depreciation, and amortization) from capital expenditure or capex activities.

Valero plans to spend ~$1 billion annually until 2021 on growth activities to achieve this EBITDA target. The company plans to spend equally between its Refining and Logistics segments. In 2017, Valero expects to incur capex of $2.7 billion. Of this, $1.1 billion would go to growth projects and $1.6 billion to sustenance activities.

However, volatile RIN (renewable identification numbers) costs continue to haunt Valero’s earnings, and this has been the likely reason behind its “hold” ratings, despite its strong investments and growth pipeline.

Valero has sound financials with low leverage and healthy cash flow. Valero has also steadily paid dividends and repurchased shares. In the second quarter, Valero posted higher earnings, beating the analysts’ estimates, and Valero’s refining margin indicators are rising quarter-over-quarter across all regions in 3Q17.

Valero’s financial strength, improving refining environment, and better earnings thus appear to be driving its improvements in analyst ratings.

Now let’s move to Phillips 66 (PSX).

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