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.
