Keeping Valero Target at $65
We are maintaining our Buy recommendation on Valero Energy Corporation (VLO) shares despite the ongoing refining-margin weakness due to high crude oil prices and weak-product demand. Valero's first-quarter earnings came weaker-than-expected on the back of reduced margins and throughput volumes, as well as an increase in refinery operating expenses.
We believe that high feedstock and operating costs will continue to weigh on near-term margins. However, our long-term view of Valero remains favorable. We also like the company's recent restructuring initiatives and its track record of returning significant capital to shareholders.
While product margins, particularly for gasoline blends, have modestly improved from their first-quarter 2008 lows, they still remain significantly below year-earlier levels. Gasoline margins remain under pressure in all markets nationwide. We have lowered our estimates to reflect this negative backdrop. Our new 2008 and 2009 EPS estimates are $5.74 and $6.43, down from $6.30 and $7.45 before, respectively.
The company is responding to the current downturn by opportunistically restructuring and rationalizing its portfolio. A combination of slower-than-anticipated growth in global refining capacity, tighter fuel specifications, and continued demand growth are expected to have a favorable impact on Valero's near-to-medium performance. Thus we expect the company to return increasingly large amounts to shareholders by dividends and buybacks.
It has been tough in the independent refining space lately. But we cannot close our eyes to the underlying strength of the U.S. refining scene. We believe Valero shares have become extremely attractive. Our unchanged $65 price objective results from 2009 P/E and P/CF multiples of 10.1x and 8.5x, respectively.
Rising Rates Felt by Bank of Ireland
We are maintaining our Hold on The Governor and Company of the Bank of Ireland (BOI, or Bank of Ireland), IRE). We are encouraged by the company's strong overall financial position. Credit quality metrics of BOI are very solid, with low levels of non-performing loans and net charge-offs relative to those of global peers. But the company's net interest margin (NIM) has been under pressure, as loan growth has outpaced deposit growth.
BOI is clearly benefiting from an upturn in the Irish economy, which is expected to continue strong. However, we think property prices in Ireland could affect the company's loan growth going forward as housing prices have risen sharply in the last few years, which may not be sustainable.
Furthermore, rising interest rates could hurt home purchases, refinancing activity, and equity lines of credit.
