Valero Energy Corp (VLO, Financial) recently recorded a daily gain of 3.11% and a three-month gain of 27.84%. With an Earnings Per Share (EPS) (EPS) of 29.03, the question arises: is the stock fairly valued? This article seeks to answer that question through a detailed valuation analysis. Read on to uncover the intrinsic value of Valero Energy and its financial performance.
Company Overview
Valero Energy is one of the largest independent refiners in the United States. It operates 15 refineries with a total throughput capacity of 3.2 million barrels a day in the United States, Canada, and the United Kingdom. Valero also owns 12 ethanol plants with a capacity of 1.6 billion gallons of ethanol a year and holds a 50% stake in Diamond Green Diesel, which has the capacity to produce 1.2 billion gallons per year of renewable diesel.
Valero Energy's current stock price stands at $139.06, which we will compare to its GF Value, an estimation of its fair value. Understanding this comparison will provide a deeper insight into the company's value, bridging financial assessment with essential company details.
GF Value Analysis
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
Considering these factors, Valero Energy (VLO, Financial) appears to be fairly valued. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns. At its current price of $ 139.06 per share, Valero Energy stock appears to be fairly valued.
Because Valero Energy is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Valero Energy has a cash-to-debt ratio of 0.45, which is worse than 53.85% of companies in the Oil & Gas industry. GuruFocus ranks the overall financial strength of Valero Energy at 8 out of 10, which indicates that the financial strength of Valero Energy is strong.
Profitability and Growth
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Valero Energy has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $157.10 Bil and Earnings Per Share (EPS) of $29.03. Its operating margin is 9.48%, which ranks better than 51.08% of companies in the Oil & Gas industry. Overall, GuruFocus ranks the profitability of Valero Energy at 8 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Valero Energy is 19.4%, which ranks better than 69.67% of companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 45.7%, which ranks better than 81.5% of companies in the Oil & Gas industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Valero Energy's return on invested capital is 28.86, and its cost of capital is 9.38.
Conclusion
In conclusion, the stock of Valero Energy appears to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 81.5% of companies in the Oil & Gas industry. To learn more about Valero Energy stock, you can check out its 30-Year Financials here.
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