What You May Have Missed About Valero Energy (VLO)

We've been asking ourselves recently if the market has placed a fair valuation on Valero Energy. Let's dive into some of the fundamental values of this large-cap Energy company to determine if there might be an opportunity here for value-minded investors.

Valero Energy Is Reasonably Valued:

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 company belongs to the Energy sector, which has an average price to earnings (P/E) ratio of 7.54 and an average price to book (P/B) ratio of 1.68. In contrast, Valero Energy has a trailing 12 month P/E ratio of 4.4 and a P/B ratio of 1.69.

When we divide Valero Energy's P/E ratio by its expected EPS growth rate of the next five years, we obtain its PEG ratio of -0.25. Since it's negative, the company has negative growth expectations, and most investors will probably avoid the stock unless it has an exceptionally low P/E and P/B ratio.

Exceptional EPS Growth at the Expense of a Highly Leveraged Balance Sheet:

2018 2019 2020 2021 2022 2023
Revenue (MM) $117,033 $108,324 $64,912 $113,977 $176,383 $157,148
Gross Margins 5% 4% -1% 3% 10% 10%
Operating Margins 4.0% 4.0% -2.0% 2.0% 9.0% 9.0%
Net Margins 3.0% 3.0% 0.0% 1.0% 7.0% 7.0%
Net Income (MM) $3,353 $2,784 $314 $1,288 $11,879 $11,412
Net Interest Expense (MM) $470 $454 $563 $603 $562 $569
Depreciation & Amort. (MM) $2,017 $2,255 $2,351 $2,405 $2,473 $2,594
Earnings Per Share $7.29 $5.84 -$3.5 $2.27 $29.04 $28.950000000000003
Diluted Shares (MM) 428 414 407 407 396 311
Free Cash Flow (MM) $3,018 $4,616 $948 $5,859 $12,574 $10,823
Net Current Assets (MM) -$1,612 -$4,028 -$3,012 -$4,788 -$957 $1,474
Long Term Debt (MM) $8,871 $9,178 $13,954 $12,606 $10,526 $10,130
Net Debt / EBITDA 1.0 1.16 15.26 2.15 0.37 0.44

Valero Energy has slimmer gross margins than its peers, weak operating margins with a positive growth rate, and a highly leveraged balance sheet. On the other hand, the company benefits from growing revenues and no capital expenditures and exceptional EPS growth. Furthermore, Valero Energy has irregular cash flows.

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.