Analyzing the Risks of Investing in VLO Shares

Standing out among the Street's worst performers today is Valero Energy, a oil & gas integrated company whose shares slumped -3.6% to a price of $148.12, 20.03% below its average analyst target price of $185.21.

The average analyst rating for the stock is buy. VLO underperformed the S&P 500 index by -5.0% during today's afternoon session, but outpaced it by 14.4% over the last year with a return of 37.4%.

Valero Energy Corporation manufactures, markets, and sells petroleum-based and low-carbon liquid transportation fuels and petrochemical products in the United States, Canada, the United Kingdom, Ireland, Latin America, Mexico, Peru, and internationally. The company is classified within the energy sector. The stock prices of energy companies are highly correlated with geopolitics: economic crisis, war, commodity prices, and politics all have an effect on the industry. For this reason, energy companies tend to have high volatility -— meaning large and frequent price swings. As global energy supplies shift towards renewables, we may see a reduced correlation between energy prices and geopolitical events.

Valero Energy's trailing 12 month P/E ratio is 7.3, based on its trailing EPS of $20.37. The company has a forward P/E ratio of 10.2 according to its forward EPS of $14.47 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US energy companies is 14.36, and the S&P 500 has an average of 27.65. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into Valero Energy market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.

Dividing Valero Energy's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.91. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Valero Energy was $9.23 Billion as of its last annual report. Over the last 4 years, the company's average free cash flow has been $6.07 Billion and they've been growing at an average rate of 15.9%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in VLO have received an annualized dividend yield of 2.7% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Valero energy's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.86, but is still below the average P/B ratio of the Energy sector, which stood at 2.1 as of the second quarter of 2024.

Valero Energy is likely undervalued at today's prices because it has a Very low P/E ratio, an average P/B ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because of its weak operating margins with a positive growth rate, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into VLO's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.

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.