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Unraveling the Valero Energy Corporation (VLO) Spin-off

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Valero Energy Corporation (NYSE:VLO) spun off its retail business into a new company called CST Brands Inc (NYSE:CST) in May 2013. The refining giant decided to spin off its retail business in an attempt to unlock value for its shareholders. Overall, CST Brands is an intriguing investment because it operates gas stations, which makes the company both a retail and energy play.

Valero Energy Corporation (NYSE:VLO)

Fuel retailer

CST Brands has 1,032 and 848 retail sites in the U.S. and Canada, respectively. Cars are crucial to the modern world so the demand for gasoline will always be there. The demand for gasoline also drives the merchandise part of the business because people are already there as a result of purchasing gasoline.

While evaluating new companies is usually tough, CST Brands Inc (NYSE:CST) has been operating as a part of Valero Energy Corporation (NYSE:VLO). Thus, there is a lot of financial information available that investors can dig through to evaluate the company. In its most recent quarter ending on March 31, CST Brands reported net income of $21 million. This is an improvement on the $14 million net income in the same quarter of the previous year. In the trailing twelve months, or TTM, CST Brands Inc (NYSE:CST) earned $216 million.


However, as is the case with all investments, consistency is important. Companies usually have years that are outliers so looking at earnings over a span of a few years is important. Since the demand for gasoline is almost recession proof, CST Brands should have consistent earnings. Check out the following table.

2012 2011 2010 2009
Net Income (millions $) 210 214 193 146

From 2009 to 2012, CST Brands posted an average net income of $191 million. In terms of earnings per share, or EPS, CST Brands posted an average EPS of $2.53 over that time period. Using a modest PE ratio of 10, this translates into a value of $25.30 per share.

However, this estimate ignores the company’s tangible book value per share or TBVPS. It is a good idea to include TBVPS in an analysis because it is value already owned by the company. Tangible book value is the same as book value except it ignores intangible assets like patents which can be difficult to value. At the end of March, CST Brands had a tangible book value per share of $17.18. Taking this into account, the company is worth about $42 per share.


CST Brands faces stiff competition from other gas stations. A big threat to CST Brands is other large gasoline chains like Royal Dutch Shell plc (ADR) (NYSE:RDS.A), which sold the largest total amount of gasoline in the U.S. in 2009. Shell dwarfs CST Brands with close to 14,000 Shell branded gas stations in the U.S.

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