# How Would Benjamin Graham Have Analyzed Valero Energy?

Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is the square root of (22.5 x earnings per share x book value per share), which for Valero Energy gives us a fair price of \$172.99, compared to the stock’s market price of \$135.96. Valero Energy’s current market is -21.4% below its market price, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.

Some investor resources mention the Graham number in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis also touches on the following points:

Sales Revenue Should Be No Less Than \$100 million.

For Valero Energy, average sales revenue over the last few years has been \$95,645,750,000.00, so according to the analysis the stock has impressive sales revenue.

Current Assets Should Be at Least Twice Current Liabilities.

We calculate Valero Energy's current ratio by dividing its total current assets of \$21,165,000,000.00 by its total current liabilities of \$16,851,000,000.00. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. Valero Energy’s current assets outweigh its current liabilities by a factor of 1.3 only.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since Valero Energy’s debt ratio is 2.5, the company has too much debt. We calculate Valero Energy’s debt to net current assets ratio by dividing its total long term of debt of \$10,840,000,000.00 by its current assets minus total current liabilities.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years.

In Valero Energy’s case, the retained earnings have averaged \$30,063,000,000.00 over the last 4 years. Retained earnings refer to the net income left for equity investors after all expenses have been accounted for, including dividends. It's a similar metric to free cash flow, with the difference being that earnings are calculated on an accrual, as opposed to a cash basis. In other words, earnings don't represent actual cash -- only evidence that the company can or will receive income based on its sales.

There should be a record of uninterrupted dividend payments over the last 20 years.

Valero Energy has offered a consistent dividend for several decades, which have returned an average yield of 4.62% over the last five years.

The company should have a minimum increase of at least one-third in Eps over the past 10 years.

10 years ago, Valero's Eps was -2.73. Now it stands at \$23.45 — an order of magnitude higher. However we should note that the current geopolitical climate has more to do with this growth than the particular merits of Valero as a company.

Based on the above analysis, we can conclude that Valero Energy satisfies some of the criteria Benjamin Graham used for identifying for an undervalued stock because it is trading below its fair value and has:

• impressive sales revenue
• an average current ratio
• too much debt
• a good record of retained earnings
• a solid record of dividends
• increasing earnings per share

Remember that the above analysis is intended to ensure that investors are not overpaying for a stock — but it does not guarantee the stock's price will move upwards!

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.