This Just In: More Upgrades and Downgrades

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:

Companies

 

Weil's Rating

CAPS Rating

Weil's Picks Beating S&P by

Range Resources (NYSE: RRC  ) Underperform *** 73 points (picked twice)

National Oilwell Varco

(NYSE: NOV  )

Outperform ***** 28 points
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.

Foolish takeaway
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.

Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he was recently ranked No. 578 out of more than 170,000 members. The Motley Fool has a disclosure policy.

National Oilwell Varco is a Motley Fool Stock Advisor choice. Chevron is a Motley Fool Income Investor pick. The Fool owns shares of ExxonMobil.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 29, 2010, at 12:27 PM, TimoDOZ wrote:

    Thank you for your outlook and train spotting on Valero. I have a derivative of Valero watch listed and like the company for that issuance's distribution and proximity to par. I have an initial tranche started as of late in RRC. I am strictly getting this as a political play on J Boehner and the rest of the Farm lobby coming to power. RRC is going to have substantially lower costs in western Penn and eastern Ohio as a result of the new House Speaker and make up in the House.. ADM announced a bit of a management shake up and there was a gift from the God's to get some shares at a strong discount today on that news. I think that the Marcellus shale development is going to proceed and RRC should continue to rapidly ramp stronger production on the introduction of less environmentally friendly extraction processes. I look to add to RRC on any new intermediate lows it may make. The last report just released earlier this week was encouraging. ADM is going to report monster earnings next Tues. Ethanol is at a 2 year high and the cost of higher corn is being offset by other constituents and the value of the waste stream. Nat gas for heating and fermenting at near record lows in price while the drying of the waste is also less expensive. That dried processed waste still has value as in the livestock feed stream. Higher costs of grains are driving up the cost to pork farmers who mostly use the ADM ethanol waste stream. ADM should make an intraday high of $37 before the end of next week. Give us Barrabbus, buy the farm lobby while the Dems on the Armed forces committee fall on Obama's sword. HBAN, DAG,MOO, in addition to ADM will ascend. ZIRP will continue to destroy the Obamnistas their public sector job base. and the state's bond ratings as their public pensions continue to fail to meet their AARRs and become even more under funded despite +10% increases in Empoler contribution from taxpayers. It is all about commodities now! The farm lobby US grain Foreign aid increases competing with the Chinese trying to buy more corn and beans of intrinsic value in lieu of risk with no return in US Treasuries. Even Nat Gas eventually rising like the Phoenix. CNOOC recently buying CHK Eagle Ford Gas properties with existing pipeline infrastructure and just a stones throw form those LNG export plants/terminals in Freeport and Sabine Pass.

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