The stock of Valero Energy (NYSE:VLO, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $78.15 per share and the market cap of $31.9 billion, Valero Energy stock gives every indication of being significantly overvalued. GF Value for Valero Energy is shown in the chart below.
Because Valero Energy is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Valero Energy has a cash-to-debt ratio of 10000.00, which ranks better than 100% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Valero Energy's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Valero Energy over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Valero Energy has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $63.6 billion and loss of $0.68 a share. Its operating margin is 0.05%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, the profitability of Valero Energy is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Valero Energy over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Valero Energy is -9%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -44.2%, which ranks worse than 89% of the companies in Oil & Gas industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Valero Energy's ROIC was -0.01, while its WACC came in at 11.91. The historical ROIC vs WACC comparison of Valero Energy is shown below:
In closing, Valero Energy (NYSE:VLO, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 89% of the companies in Oil & Gas industry. To learn more about Valero Energy stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
