Today, we explore the valuation of Valero Energy Corp (VLO, Financial), a leading independent refiner in the United States. With a daily gain of 2.81% and a 3-month gain of 28.32%, Valero Energy has an Earnings Per Share (EPS) (EPS) of 29.03. However, the question remains: is the stock modestly overvalued? To answer this, we delve into a detailed valuation analysis. Let's unpack the financials and intrinsic value of Valero Energy.
Company Snapshot
Valero Energy operates 15 refineries with a total throughput capacity of 3.2 million barrels a day across the United States, Canada, and the United Kingdom. The company also owns 12 ethanol plants with a capacity of 1.6 billion gallons of ethanol per year and holds a 50% stake in Diamond Green Diesel, which can produce 1.2 billion gallons per year of renewable diesel. With a stock price of $148 per share, the company has a market cap of $52.30 billion. However, its GF Value, an estimation of fair value, stands at $133.04, suggesting that the stock may be modestly overvalued.
Understanding GF Value
The GF Value is a proprietary measure that estimates the intrinsic value of a stock. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page offers an overview of the fair value at which the stock should ideally trade. When the stock price significantly surpasses the GF Value Line, it is considered overvalued, and its future return is likely to be poor. Conversely, if the stock price falls significantly below the GF Value Line, its future return will likely be higher.
Based on the GuruFocus Value calculation, Valero Energy (VLO, Financial) stock is believed to be modestly overvalued. At its current price of $148 per share, Valero Energy has a market cap of $52.30 billion. Therefore, the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Valero Energy has a cash-to-debt ratio of 0.45, which is worse than 51.84% of 1034 companies in the Oil & Gas industry. GuruFocus ranks the overall financial strength of Valero Energy at 8 out of 10, which indicates that the financial strength of Valero Energy is strong.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Valero Energy has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $157.10 billion and Earnings Per Share (EPS) of $29.03. Its operating margin is 9.48%, which ranks better than 52.03% of 984 companies in the Oil & Gas industry. Overall, GuruFocus ranks the profitability of Valero Energy at 8 out of 10, which indicates strong profitability.
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Valero Energy's 3-year average revenue growth rate is better than 69.37% of 862 companies in the Oil & Gas industry. Valero Energy's 3-year average EBITDA growth rate is 45.7%, which ranks better than 81.08% of 830 companies in the Oil & Gas industry.
ROIC vs WACC
Another way to evaluate the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Valero Energy's return on invested capital is 28.86, and its cost of capital is 10.15.
Conclusion
In summary, the stock of Valero Energy (VLO, Financial) is believed to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 81.08% of 830 companies in the Oil & Gas industry. To learn more about Valero Energy stock, you can check out its 30-Year Financials here.
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