Value Analysis of Valero Energy Every Investor Should Read

Valero Energy (VLO) stock climbed 1.0 % this morning. According to our metrics, the company seems undervalued at today's prices. In the below analysis, we will put Valero Energy's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.

Valero Energy Corporation manufactures, markets, and sells transportation fuels and petrochemical products in the United States, Canada, the United Kingdom, Ireland, Latin America, and internationally. The large-cap Energy company is based in San Antonio, United States and has 9,716 full time employees.

VLO's P/E Ratio Is Better Than the Sector Average

Compared to the Energy sector's average of 7.54, Valero Energy has a trailing twelve month price to earnings (P/E) ratio of 3.9 and an expected P/E ratio of 10.1. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $35.12 and $13.37 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Valero Energy's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Valero Energy Has a Negative Rate of Expected Growth

P/E ratios are falling out of favor as a means of valuing stocks for a number of reasons. Earnings are subject to manipulation, and the P/E ratio is static in time, in the sense that it doesn't take into account expected long term growth of the company. Although estimated long terms growth rates are just as easily manipulable as earnings, dividing Valero Energy's P/E ratio by its expected growth rate can tell us the relative market valuation of the company in relation to expected earnings growth.

The resulting metric, called price to earnings growth (PEG) is -0.28 for Valero Energy. Since the PEG ratio is negative and the company's reported earnings per share are positive, we can deduce that the company's expected growth rate is negative. Needless to say, this is a red flag for investors with a long term horizon.

VLO Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Valero Energy, the P/B value is 1.85 while the average for the Energy sector is 1.68.

VLO Is Generating Cash

Valero Energy has decent free cash flows. This represents the actual cash that the company is generating from its sales revenues, minus its re-investments in the business (capital expenditures). The company's operating cash flows have an average growth rate of 22.8%, compared to -17.4% for capital expenditures. From the table below we can also see that the free cash flows has an average growth rate of 16.8% and a coefficient of variability of 65.8%:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cashflow ($ k) YoY Growth (%)
2023-02-23 12,574,000 -756,000 13,330,000 118.45
2022-02-22 5,859,000 -243,000 6,102,000 211.01
2021-02-23 948,000 -1,014,000 1,962,000 -72.59
2020-02-26 5,531,000 -1,627,000 7,158,000 n/a

Valero Energy Is Not a Profitable Business

If you are looking to make VLO a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Valero Energy's management may be able to make the business profitable in the future.

Valero Energy's Gross Margins

Date Reported Revenue ($ k) Cost of Revenue ($ k) Gross Margins (%) YoY Growth (%)
2023-02-23 176,383,000 -159,587,000 9.52 246.18
2022-02-22 113,977,000 -110,848,000 2.75 341.23
2021-02-23 64,912,000 -65,652,000 -1.14 -125.85
2020-02-26 108,324,000 -103,546,000 4.41 n/a

Valero Energy's Operating Margins

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-23 176,383,000 -1,045,000 8.93 377.54
2022-02-22 113,977,000 -999,000 1.87 176.95
2021-02-23 64,912,000 -839,000 -2.43 -168.64
2020-02-26 108,324,000 -942,000 3.54 n/a

Valero Energy's cost of revenue is growing at a rate of -11.4% in contrast to -2.6% for operating expenses. Sales revenues, on the other hand, have experienced a 13.0% growth rate. As a result, the average gross margins growth is 21.2 and the average operating margins growth rate is 26.0, with coefficients of variability of 113.7% and 157.8% respectively.

We See Mixed Market Signals Regarding VLO

Valero Energy has an average rating of buy and target prices ranging from $160.0 to $130.0. At its current price of $135.24, the company is trading -7.26% away from its target price of $145.82. 3.1% of the company's shares are linked to short positions, and 81.1% of the shares are owned by institutional investors.

Date Reported Holder Percentage Shares Value
2023-03-31 Vanguard Group Inc 10% 35,428,555 $4,791,357,972
2023-03-31 Blackrock Inc. 9% 33,260,075 $4,498,092,725
2023-03-31 State Street Corporation 8% 26,494,519 $3,583,118,895
2023-03-31 FMR, LLC 4% 13,096,309 $1,771,144,901
2023-03-31 Bank of America Corporation 3% 9,389,258 $1,269,803,303
2023-03-31 Morgan Stanley 2% 8,718,116 $1,179,038,055
2023-03-31 Charles Schwab Investment Management, Inc. 2% 8,038,939 $1,087,186,154
2023-03-31 Geode Capital Management, LLC 2% 6,958,780 $941,105,445
2023-03-31 Ameriprise Financial, Inc. 2% 6,865,598 $928,503,511
2023-03-31 Nuveen Asset Management, LLC 2% 5,694,244 $770,089,589
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.