At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
With the U.S. economy still in a funk, a weak dollar keeping crude oil prices high, and 9.6% of the working population not working (and not commuting by car to work either), it might seem a funny time to go around upgrading oil refiners. Yet that's just what Howard Weil did yesterday, upgrading Valero (NYSE: VLO ) to a "market outperform" rating.
As happens all too often, news reports on the recommendations are frustratingly laconic on the details, and why Weil likes the stock. But while I'm unable to tell you exactly what Weil thinks about these stocks, with a little help from CAPS, I can at least give you an idea how well it thinks.
Let's go to the tape
And in Weil's case, at least, that may be enough. You see, there aren't a whole lot of analysts out there with a reputation even approaching Weil's rep in the oil and gas world. We've been keeping close tabs on Weil's performance in this industry ever since it began reporting ratings through Briefing.com. Would you like to know how Weil's done?
Sure you would. And now you can:
Weil's Picks Beating S&P by
|Range Resources (NYSE: RRC )||Underperform||***||73 points (picked twice)|
National Oilwell Varco
(NYSE: NOV )
|Tesoro (NYSE: TSO )||Outperform||***||4 points|
|Marathon Oil (NYSE: MRO )||Outperform||*****||2 points|
Unlike most analysts we track, who spread themselves thin trying to cover (it sometimes seems like) every industry on the globe, Howard Weil does just one thing -- energy -- and does it very well. Fully 81% of the analysts' picks in the energy equipment and services industry outperform the market. Within oil, gas, and consumable fuels (Valero's home turf), the record's a less-stellar, but still impressive, 58%. Weil's been wowing us even more lately, with better than 65% accuracy on its active recommendations.
And call me an optimist, but I think Weil's done it again with this week's pick of Valero.
Veni, vidi, Valero
Admittedly, Valero's not the most obvious winner in this industry. When seeking profits in oil, more diversified plays like ExxonMobil (NYSE: XOM ) or Chevron (NYSE: CVX ) , which also dabble in refining, probably pop to mind -- not least because these two companies are profitable, while Valero is still reporting losses on its 12-month earnings returns. And yet, if you dig just a little deeper into this story, I think you'll like what you find: Because beneath a veneer of GAAP losses, Valero is swimming in honest-to-goodness cash profits.
Although Valero reported earnings Tuesday, the company gave investors only half a glance at its free cash flow picture for the time being (tsk, tsk). Still, what Valero did deign to tell us is important: Capital spending will reach $2.3 billion this year and total $2.6 billion in 2011. As far as operating cash flow goes, we know that over the past five years, the company has averaged something on the order of $4.45 billion per year. (More in most years, less last year.) Subtract expected capex from this number, therefore, and we're probably looking at a company that can throw off $2 billion free cash flow in an "average" year.
Thus, at $10 billion in market cap, and roughly $6 billion in net debt, Valero sells for either five times free cash flow, or has an enterprise value of eight times free cash flow -- depending on how you look at it. Either way you look at it, the stock is remarkably cheap if Valero can come anywhere near producing the 18% long-term growth that Wall Street sees for it.
Sure, Valero is still reporting losses on its income statement, but according to Wall Street, these losses should fade into distant memory as early as next year. And with a tidy 1.1% dividend to tide them until the promised growth materializes, I think investors can afford to wait around for this one. Valero's a keeper.