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Valero (VLO): Stock to Disappoint This Earnings Season?

Leading North American independent refiner and marketer of petroleum products, Valero Energy Corporation VLO is set to report first-quarter 2016 results on May 3. Let’s see how things are shaping up prior to the announcement.

In the preceding three-month period, the company reported a positive earnings surprise of 27.86%. Coming to earnings surprise history, Valero Energy beat estimates in each of the last four quarters.


Let’s see how things are shaping up for this announcement:

Factors to Consider

Among independent refiners, Valero has the most diversified refinery base with a capacity of 2.9 million barrels per day through its 15 refineries located throughout the U.S., Canada and the Caribbean. More importantly, Valero is best positioned to profit from increased refining margins mainly due to its strategic refinery structure that enables it to use cheaper oil for more than half of its needs.

The refining segment, which contributes the bulk of Valero’s revenues and earnings, is the major growth driver. However, given that refiners are buyers of crude, an increase in oil prices can limit their profitability.

Refiners in the U.S. generally face uncertainty regarding future regulations pertaining to greenhouse gas emissions and the potential for higher requirement of biofuels. Other risks include government regulations, weather conditions, crude oil and natural gas prices as well as renewable fuel prices. These might result in increased costs, reduced growth and fines or other sanctions.

Another area of concern for the company is its weak operating cash flow.

Earnings Whispers

Our proven model does not conclusively show that Valero Energy is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1(Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.   

Zacks ESP: Valero Energy currently has an Earnings ESP of -5.48%. This is because the Most Accurate estimate is 69 cents and the Zacks Consensus Estimate stands higher at 73 cents.

Zacks Rank: Valero Energy carries a Zacks Rank #3. Though this increases the predictive power, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Though an earnings beat looks uncertain for Valero Energy, here are some companies you may want to consider on the basis of our model, which shows that they have the right combination of elements to post an earnings beat this quarter:

DCP Midstream Partners LP DPM has an Earnings ESP of +9.52% and a Zacks Rank #2. The company is slated to release earnings on May 4.

Enable Midstream Partners, LP ENBL has an Earnings ESP of +21.05% and a Zacks Rank #2. The company is slated to release earnings on May 4.

Hercules Offshore, Inc. HERO has an Earnings ESP of +15.24% and a Zacks Rank #2. The company is slated to release earnings on May 4.

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