Here's Why Valero Energy (VLO) Is a Defensive Stock According to the Graham Test

Valero Energy meets some but not all of Benjamin Graham's requirements for a defensive stock. The Oil & Gas Integrated company does not offer a large enough margin of safety for cautious investors, but it does have many qualities that may interest more enterprising investors.

Valero Energy Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 4 year average earnings per share (9.94) * 4 year average book value per share (73.207) = $127.96

After an impressive 23.0% performance over the 12 months, Valero Energy is now trading well over its price because its Graham number is -0.2% above today's share price of $127.7. Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Impressive Revenues, Consistent Profitability, and a Growing Dividend Imply Value

Valero Energy’s average sales revenue over the last 4 years has been $115.9 Billion, so by Graham’s standards the stock has sufficient revenues to make it worthy of investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today.

Ben Graham believed that a margin of safety could be obtained by investing only in companies with consistently positive retained earnings. Retained earnings represent the cumulative net earnings or (deficit) left to equity holders after dividends have been paid out. Valero Energy had positive retained earnings from 2008 to 2022 with an average of $23.64 Billion over this period.

Ben Graham would also require a cumulative growth of Earnings Per Share of at least 30% over the last ten years.To determine Valero Energy's EPS growth over time, we will average out its EPS for 2007, 2008, and 2009, which were $8.88, $-2.16, and $-2.51 respectively. This gives us an average of $1.40 for the period of 2007 to 2009. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $-3.50, $2.27, and $29.04, for an average of $9.27. Now we see that Valero Energy's EPS growth was 562.14% during this period, which satisfies Ben Graham's requirement.

Negative Current Asset to Liabilities Balance and an Average Current Ratio

Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Valero Energy fails on both counts with a current ratio of 1.4 and a debt to net current asset ratio of -0.9.


Valero Energy offers a decent combination of value, growth, and profitability. These factors imply that the investment offers a decent margin of safety — especially if the shares are bought during a sell-off.

2020-02-26 2021-02-23 2022-02-22 2023-02-23
Revenue (MM) $108,324 $64,912 $113,977 $176,383
Gross Margins 4.4% -1.1% 2.8% 9.5%
Operating Margins 3.5% -2.4% 1.9% 8.9%
Net Margins 2.24% -2.19% 0.82% 6.54%
Net Income (MM) $2,422 -$1,421 $930 $11,528
Net Interest Expense (MM) -$454 -$563 -$603 -$562
Depreciation & Amort. (MM) -$2,255 -$2,351 -$2,405 -$2,473
Earnings Per Share $5.85 -$3.49 $2.28 $35.12
EPS Growth n/a -159.66% 165.33% 1440.35%
Diluted Shares (MM) 414 407 408 362
Free Cash Flow (MM) $7,158 $1,962 $6,102 $13,330
Capital Expenditures (MM) -$1,627 -$1,014 -$243 -$756
Net Current Assets (MM) -$12,359 -$16,288 -$16,906 -$11,381
Current Ratio 1.44 1.71 1.26 1.38
Long Term Debt (MM) $9,178 $13,954 $12,606 $10,526
Net Debt / EBITDA 1.6 4.74 2.65 0.61
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.