Evaluating Valero After Strong 2024 Gains and New Renewable Diesel Production Expansion

If you have been watching the energy sector, you have probably noticed Valero Energy popping up on more investors’ radars lately. Maybe you are trying to decide if now is the moment to get in, take profits, or just keep riding along with the momentum. Let’s talk it through. Over the past year, Valero has jumped by 21.0%, and that is just a slice of the story. Over the last five years, the stock has ballooned a massive 301.6%. Even more striking, Valero has gained 14.6% in the past month alone while the energy market digests shifting oil prices and evolving talks around clean energy transition. It is not unusual to see some short-term give and take, like the recent 0.4% dip over the past week, but the uptrend speaks for itself.

With a value score of 2 out of 6, Valero is currently undervalued in only a couple of the six standard valuation checks. That score is a useful data point, but it does not tell the whole story on its own. The real question is whether the current price reflects fair value or if there are overlooked opportunities (or risks) hiding in plain sight. Next, we will dig into how the usual valuation methods stack up for Valero, and why there might be an even smarter way to look at what the market is missing.

Valero Energy scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Valero Energy Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow (DCF) model estimates a company’s fair value by projecting its future cash flows and then discounting those amounts back to today’s terms. This approach provides insight into what the stock might be worth, based on its potential to generate future cash.

For Valero Energy, the current Free Cash Flow (FCF) reported over the last twelve months stands at $3.35 Billion. Analysts forecast moderate growth in annual FCF, with projections indicating a rise to $4.41 Billion by the end of 2029. Although analysts provide formal estimates for the next five years, projections through 2035 are extrapolated using various analyst and model assumptions.

The DCF model applied in this analysis suggests Valero Energy's intrinsic value is $253.96 per share. According to this model, the stock is trading at a 38.3% discount to its estimated fair value, which may indicate significant undervaluation by the market at this time.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Valero Energy.

Our Discounted Cash Flow (DCF) analysis suggests Valero Energy is undervalued by 38.3%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Valero Energy Price vs Earnings

The Price-to-Earnings (PE) ratio is widely used for valuing profitable companies, as it shows how much investors are paying today for each dollar of future earnings. For companies that generate consistent profits, like Valero Energy, the PE ratio can provide a quick snapshot of how the market is valuing the company relative to its actual bottom line performance.

A company’s “normal” or “fair” PE ratio is influenced by several factors. Higher growth expectations, strong profitability, and lower business risks typically warrant a higher PE, while slower growth or higher risks pull the ratio down. Comparing a company’s PE to industry averages and peers can indicate whether investors are optimistic or cautious about its future prospects.

Right now, Valero Energy trades at a PE of 64.1x. This is markedly higher than both the Oil and Gas industry average of 12.8x and the average among comparable peers at 26.8x. However, Simply Wall St’s proprietary “Fair Ratio” for Valero, which factors in its unique risk profile, growth forecast, margins, industry, and market cap, is 22.0x. The Fair Ratio is a refinement beyond typical comparisons and aims to reflect what Valero’s PE should be, not just how it stacks up to others.

With Valero’s current PE of 64.1x sitting significantly above its Fair Ratio of 22.0x, this suggests the market is pricing in more optimism than the company’s fundamentals and outlook justify at this time.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Valero Energy Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let’s introduce you to Narratives. A Narrative is your own story or perspective on a company. It combines your assumptions about future revenue, earnings, margins, and risks to create a financial forecast and an estimated fair value, putting context behind the numbers.

Narratives help you connect what is happening in the real world, such as business changes or industry trends, to what that might mean for a company’s financial future. By using Narratives, you can easily see how your view compares to other investors and analysts, and even update your outlook as new information emerges. They are available right now on Simply Wall St’s Community page and are used by millions of investors to answer the ultimate question: is now the right time to buy or sell?

Narratives are dynamic and update with real-time developments such as earnings reports or important news, so your investment thesis stays up to date. For example, some investors project a fair value for Valero Energy as high as $181, based on bullish revenue growth and profit margin assumptions. The most cautious estimate sets fair value as low as $133, reflecting risks like California refinery closures or regulatory headwinds.

Do you think there's more to the story for Valero Energy? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com