Stock Analysis

Declining Stock and Decent Financials: Is The Market Wrong About Valero Energy Corporation (NYSE:VLO)?

  •  Updated
NYSE:VLO
Source: Shutterstock

Valero Energy (NYSE:VLO) has had a rough month with its share price down 17%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Valero Energy's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Valero Energy

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Valero Energy is:

32% = US$7.4b ÷ US$23b (Based on the trailing twelve months to June 2022).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.32 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Valero Energy's Earnings Growth And 32% ROE

To begin with, Valero Energy has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 26% which is quite remarkable. As you might expect, the 20% net income decline reported by Valero Energy doesn't bode well with us. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 3.4% in the same period, we still found Valero Energy's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

past-earnings-growth
NYSE:VLO Past Earnings Growth September 27th 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is VLO fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Valero Energy Making Efficient Use Of Its Profits?

Valero Energy's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 56% (or a retention ratio of 44%). With only very little left to reinvest into the business, growth in earnings is far from likely.

Moreover, Valero Energy has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 47% of its profits over the next three years. Regardless, Valero Energy's ROE is speculated to decline to 15% despite there being no anticipated change in its payout ratio.

Conclusion

In total, it does look like Valero Energy has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Additionally, the latest industry analyst forecasts show that analysts expect the company's earnings to continue to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

What are the risks and opportunities for Valero Energy?

Valero Energy Corporation manufactures, markets, and sells transportation fuels and petrochemical products in the United States, Canada, the United Kingdom, Ireland, and internationally.

View Full Analysis

Rewards

  • Price-To-Earnings ratio (4.8x) is below the US market (14.5x)

  • Became profitable this year

Risks

  • Earnings are forecast to decline by an average of 50.3% per year for the next 3 years

View all Risks and Rewards

Share Price

Market Cap

1Y Return

View Company Report

About NYSE:VLO

Valero Energy

Valero Energy Corporation manufactures, markets, and sells transportation fuels and petrochemical products in the United States, Canada, the United Kingdom, Ireland, and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance3
Financial Health5
Dividends5

Read more about these checks in the individual report sections or in our analysis model.

Excellent balance sheet established dividend payer.