Oil & Gas Stocks

Valero Energy Corp Valuation – February 2016 $VLO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – February 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Valero Energy Corp (VLO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Valero Energy Corp (Valero) is an international manufacturer and marketer of transportation fuels, other petrochemical products and power. The Company’s refineries can produce conventional gasolines, premium gasolines, gasoline, diesel fuel, low-sulfur diesel fuel, ultra-low-sulfur diesel fuel, CARB diesel fuel, other distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products. The Company markets branded and unbranded refined products through approximately 7,400 outlets. The Company also owns 11 ethanol plants in the central plains region of the United States that primarily produce ethanol. The Company operates through two segments. The refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations in the United States, Canada, the United Kingdom, Aruba and Ireland. Its ethanol segment primarily includes sale of internally produced ethanol and distillers grains.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of VLO

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $25,328,534,527 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.39 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 592.46% Pass
6. Moderate PEmg Ratio PEmg < 20 8.42 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -3.78 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.39 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.41 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

VLO value chart February 2016

EPSmg $6.51
MG Growth Estimate 15.00%
MG Value $250.51
Opinion Undervalued
MG Value based on 3% Growth $94.35
MG Value based on 0% Growth $55.31
Market Implied Growth Rate -0.04%
Current Price $54.81
% of Intrinsic Value 21.88%

Valero Energy Corp qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings stability over the last ten years along with the high PB ratio.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.71 in 2012 to an estimated $6.51 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of negative 0.04% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

Stage 3: Information for Further Research

VLO charts February 2016

Net Current Asset Value (NCAV) $35.13
Graham Number $46.53
PEmg 8.42
Current Ratio 3.39
PB Ratio -3.78
Dividend Yield 3.10%
Number of Consecutive Years of Dividend Growth 6

 

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Most Recent Balance Sheet Figures

Balance Sheet Information Dec2015
Total Current Assets $24,817,000,000
Total Current Liabilities $7,320,000,000
Long-Term Debt $7,250,000,000
Total Assets $45,825,000,000
Intangible Assets $0
Total Liabilities $7,250,000,000
Shares Outstanding (Diluted Average) 500,000,000

Earnings Per Share History

Next Fiscal Year Estimate $6.28
Dec2015 $7.99
Dec2014 $6.85
Dec2013 $4.97
Dec2012 $3.75
Dec2011 $3.68
Dec2010 $0.57
Dec2009 -$3.67
Dec2008 -$2.16
Dec2007 $8.88
Dec2006 $8.64
Dec2005 $6.10
Dec2004 $3.27
Dec2003 $1.27
Dec2002 $0.21
Dec2001 $2.21
Dec2000 $1.40
Dec1999 $0.06
Dec1998 -$0.21
Dec1997 $0.44
Dec1996 $0.35

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.51
Dec2015 $6.23
Dec2014 $4.89
Dec2013 $3.22
Dec2012 $1.71
Dec2011 $0.95
Dec2010 $0.54
Dec2009 $1.54
Dec2008 $4.41
Dec2007 $7.00
Dec2006 $5.34
Dec2005 $3.33
Dec2004 $1.86
Dec2003 $1.11
Dec2002 $0.93
Dec2001 $1.12
Dec2000 $0.52

Recommended Reading:

Other ModernGraham posts about the company

5 Undervalued Companies for Value Investors with a High Beta – January 2016
5 Undervalued Companies for Value Investors with a High Beta – October 2015
10 Companies Benjamin Graham Would Invest In Today – September 2015
The Best Companies of the Oil & Gas Industry – August 2015
10 Low PE Stocks for the Enterprising Investor – August 2015

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

3 thoughts on “Valero Energy Corp Valuation – February 2016 $VLO

  1. Hi,

    May be I am missing something, but how did you arrive at a Graham # of $46.53? I get $83.81, I can understand smaller differences, but this is quite large.

  2. okay, thank. Love your work, great to start investigating an investment.

    Is it possible for you to run the numbers on a business called FactSet, (FDS)? Small business ($1B+) but great results so far.

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