Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewingÂ 5 Undervalued Companies for the Defensive Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Valero Energy Corp (VLO) fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Valero Energy Corporation (Valero) is an independent petroleum refining and marketing company. Valeroâ€™s refineries can produce conventional gasolineâ€™s, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products, as well as a slate of premium products, including conventional blendstock for oxygenate blending and reformulated gasoline blendstock for oxygenate blending, gasoline meeting the specifications of the California Air Resources Board, a diesel fuel, and low-sulfur and ultra-low-sulfur diesel fuel. It also owns 10 ethanol plants in the central plains region of the United States with a combined ethanol nameplate production capacity of about 1.1 billion gallons per year. It operates in three business segments: refining, ethanol, and retail. In May 2013, CST Brands Inc announced that the Company which includes Corner Store and Depanneur du Coin, spun off from Valero Energy Corporation.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$51.73|
|Value Based on 0% Growth||$30.32|
|Market Implied Growth Rate||3.60%|
|Net Current Asset Value (NCAV)||-$15.91|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Valero Energy Corp does not qualify for either the Defensive Investor or the Enterprising Investor. Â The company’s current ratio is too low and there has been insufficient earnings stability or growth over the ten year historical period for the Defensive Investor. Â The Enterprising Investor is concerned with low current ratio and the lack of earnings stability over the five year period. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review ofÂ ModernGraham’s valuation of Exxon Mobil (XOM)Â andÂ 5 Outstanding Dow Components. Â From a valuation side of things, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.31 in 2009 to $3.57 in 2013. Â This solid level of demonstrated growth outpaces the market’s implied estimate of 3.6% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Valero Energy Corp (VLO)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Valero Energy Corp (VLO) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.