Valero Very Attractively Priced
While the weak refining margin environment that started in the second half of last year continues to weigh on stocks of independent refiners such as Valero (VLO), we are maintaining our Buy recommendation on the stock. We have, however, lowered our estimates (2008: $6.30 vs. $8.10) and price objective ($65 vs. $74).
While we expect continued near-term downstream weakness, our long-term view of the business remains favorable, particularly for Valero, given its complex and geographically diverse refining system. We also like the company's recent restructuring initiatives and its track record of returning significant capital to shareholders.
It has been tough in the independent refining space lately; in fact, the group has been under pressure since the start of the second half of 2007. The primary cause for this has been the very weak refining margin environment brought about by unusually high feedstock costs and relatively modest product demand.
Concern about the overall health of the economy and its impact on product demand is not helping matters either. While we are cognizant of these headwinds, we can not close our eyes to the underlying strength of the U.S. refining scene.
We believe that independent refining stocks in general and Valero shares in particular have become extremely attractive following the recent weakness. We expect the sentiment to start shifting in the coming weeks as refiners switch to summer-grade gasoline and the market starts taking note of the upcoming driving season's supply-demand situation. Our new $65 price objective, reduced from $74 before, results from 2008 P/E and P/CF multiples of 10.3x and 7.9x, respectively.
Keeping a Sell on Huntington Bank
Before the market opens on April 22, 2008, Huntington Bancshares (HBAN) intends to release its 1Q08 results with a conference call scheduled for later the same day. 4Q07 reported results came in at a loss of $0.65 per share.
The merger with Sky Financial has weighed on the share price in the current quarter, with the potential for negative implications over the next several quarters. The relationship with Franklin, inherited with the aforementioned acquisition, contributed significantly to this loss. Weaknesses in the housing and credit environment continue and are expected to overhang the market in 2008.
In addition, the potential for a dividend cut, places a critical underpinning for the
share price at risk. Thus, we are maintaining our Sell recommendation on the shares. Our new six-month target price of $9.00 per share is approximately 0.66x our projected book value for 2Q08 of $13.56 per share, 6.4x our 2008 earnings estimate of $1.40 per share.
