The fall in Valero Energy’s earning is in line with Phillips 66 (PSX), which saw a 3% decline in its earnings in the quarter. However, Marathon Petroleum’s profits rose 49% in the third quarter. The companies’ stocks have also increased since their earnings. While Marathon Petroleum stock has risen 0.9% since October 23, Phillips 66 stock has risen 9.7%.
Analysts raised Valero Energy’s target price
Analysts reacted positively to Valero Energy’s earnings. Raymond James raised its target price on the stock to $106 with an “outperform” rating. RBC increased its target price on the stock from $98 to $99. Similarly, Scotiabank raised its target price on the stock from $121 to $124.
Analysts’ mean target price on Valero Energy stock is $106, which implies a 4% gain from the current level. Among the 19 analysts that cover the stock, 16 recommend a “buy” or “strong buy,” while three recommend a “hold.”
Expansion and growth plans
Valero Energy’s earnings fell its latest results due to the weak refining environment. However, the company continues on its growth path. The company has a healthy project pipeline, which will likely expand its earnings. The company expects its projects to raise its EBITDA by $1.2 billion–$1.5 billion by 2022.
The projects are in the refining and logistics segment. The projects will result in a better refining yield and feedstock flexibility in the refining segment. Also, expanding logistics capabilities help the company optimize its value chain.
In the third quarter, Valero Energy started its Central Texas pipelines and terminals, which will provide an alternative to supply fuel to the Central Texas region. In the previous quarter, the company started its alkylation unit at the Houston refinery, which will help it produce high-value products. Valero Energy’s other projects, which it expects to start next year, include the Pembroke co-generation units, Pasadena terminal, and St. Charles alkylation units.
Valero Energy expects to spend about $1 billion on the growth projects next year. Overall, the company plans to spend $2.5 billion in 2020. Analysts expect the company’s earnings to rise 97% in 2020—the highest among its peers.
Valero Energy has consistently provided shareholder returns in the past. The company pays reliable and rising dividends and buys back shares.
In the first nine months of 2019, the company paid $555 million in dividends and repurchased $1.123 billion worth of shares. The company also announced a dividend of $0.9 to be paid in the fourth quarter, which shows 13% YoY growth.
Valero Energy stock has a dividend yield of 3.6%—the highest among its peers. Marathon Petroleum and Philips 66’s yields are 3.2% and 3.0%, respectively.
Why analysts like Valero Energy stock
Analysts like Valero Energy stock due to its growth activities, which will result in better earnings in the next few years. Also, the company will likely post the highest growth in its EPS in 2020 compared to its peers. The stock has the highest dividend yield with rising shareholder returns.