• Investors may be wondering whether Valaris at around US$102 a share still offers value, or if most of the opportunity is already priced in.
• The recent share price of US$102.23 comes after returns of 12.1% over the last 7 days, 4.3% over 30 days, 96.0% year to date and 184.3% over the past year. This naturally raises questions about how much upside or risk is now built into the stock.
• Recent coverage has focused on Valaris as a key name in offshore drilling and contract drilling services, with attention on how its position in energy services could affect longer term cash flows. This context helps explain why investors are reassessing what they are willing to pay for the shares.
• Valaris currently has a valuation score of 4/6. The rest of this article will unpack what that means across several valuation approaches, before finishing with a way to connect those numbers to the broader story behind the stock.

Approach 1: Valaris Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model estimates what a business could be worth today by projecting its future cash flows and then discounting those back to a present value.

For Valaris, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections in $. The latest twelve month free cash flow is about $2.76 million. Analyst inputs extend out to 2027, with Simply Wall St extrapolating further to build a ten year path of free cash flow estimates, including a projected $2,059.78 million in 2035.

When all of those projected cash flows are discounted back, the model arrives at an estimated intrinsic value of about $485.98 per share. Compared with the recent share price of around $102.23, this implies the stock is 79.0% undervalued according to this DCF framework.

This is a model driven result and it indicates that the current price is well below the level suggested by the cash flow projections used in this analysis.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Valaris is undervalued by 79.0%. Track this in your watchlist or portfolio, or discover 51 more high quality undervalued stocks.

Approach 2: Valaris Price vs Earnings

For a profitable company, the P/E ratio is a useful way to think about what you are paying for each dollar of current earnings. Investors usually accept a higher P/E when they expect stronger growth or see lower risk, and a lower P/E when growth is more modest or risks feel higher.

Valaris currently trades on a P/E of 7.20x. That sits well below the Energy Services industry average P/E of 26.91x and the peer group average of 26.44x, which suggests the market is assigning a lower earnings multiple to Valaris than to many of its sector peers.

Simply Wall St’s Fair Ratio framework aims to refine this comparison by estimating what a more tailored P/E might look like for Valaris, given its earnings growth profile, industry, profit margins, market cap and risk factors. For Valaris, the Fair Ratio is 7.14x, which is much closer to the current P/E than the broad industry or peer averages and offers a more company specific anchor for expectations. Since the P/E of 7.20x is only slightly above the Fair Ratio of 7.14x, the shares screen as roughly in line with this preferred multiple approach.

Result: ABOUT RIGHT

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Upgrade Your Decision Making: Choose your Valaris Narrative

Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you attach a clear story to your numbers by linking your view of Valaris, your forecast for revenue, earnings and margins, and the fair value you think that implies. You can then compare that fair value to the current price to help you decide whether the stock looks appealing or stretched. These Narratives update automatically when news or earnings arrive and can capture very different perspectives, such as a cautious view around US$47 per share that leans on slower growth and a lower future P/E, or a more optimistic view closer to US$98 that assumes stronger revenue prospects and a higher multiple. All of these are available for you to explore and customise on the Community page that is used by millions of investors.

Do you think there's more to the story for Valaris? Head over to our Community to see what others are saying!

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.