• Investors may be wondering if Valero Energy at around US$240 a share still offers value, or if most of the opportunity is already priced in.
• The stock has pulled back around 5.3% over the past week, but is roughly flat over the last month and remains up 45.4% year to date and 94.2% over the past year. This is likely to catch the attention of anyone weighing potential upside against risk.
• Recent coverage has focused on how refining and energy stocks like Valero Energy are being reassessed by investors, with attention on factors such as fuel demand trends, capital spending, and shareholder returns. This context helps explain why the share price can move sharply over shorter periods even when the long term story appears more stable.
• Valero Energy currently has a valuation score of 3 out of 6, which reflects passing half of the undervaluation checks. This sets up a closer look at P/E, price to cash flow, asset-based and cash-flow-based approaches, along with a more rounded way to think about value at the end of this article.

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

A Discounted Cash Flow, or DCF, model takes estimates of a company’s future cash flows and discounts them back to today’s dollars to arrive at an estimate of what the business might be worth right now.

For Valero Energy, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections. The latest twelve month Free Cash Flow is about $5.47b. Analysts provide explicit Free Cash Flow estimates for the next few years, and Simply Wall St then extends those projections, with the ten year path including figures such as $8.55b in 2026 and $4.76b in 2030, all in dollar terms and then discounted back to today.

Putting those discounted cash flows together results in an estimated intrinsic value of about $344.80 per share. Against a current share price around $240, the model implies the stock trades at a 30.3% discount, which indicates that, on this DCF view, Valero Energy appears to be trading below this estimated intrinsic value.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Valero Energy is undervalued by 30.3%. Track this in your watchlist or portfolio, or discover 47 more high quality undervalued stocks.

Approach 2: Valero Energy Price vs Earnings

The P/E ratio is a common way to think about value for profitable companies, because it links what you pay for the stock to the earnings the company is currently generating. Over time, higher expected growth and lower perceived risk usually justify a higher P/E, while lower growth expectations and higher risk point to a lower P/E being more typical.

Valero Energy trades on a P/E of 17.01x. This sits above the Oil and Gas industry average of 13.79x and also above the peer group average of 14.86x, which may suggest investors are currently paying a higher price for each dollar of earnings than for many industry peers.

Simply Wall St’s Fair Ratio for Valero Energy is 20.73x. This is a proprietary estimate of what the P/E might be based on factors such as the company’s earnings growth profile, its industry, profit margins, market capitalization and risk characteristics. Because it adjusts for these specific attributes, the Fair Ratio can give a more tailored view than a simple comparison with industry or peer averages.

Comparing the current P/E of 17.01x with the Fair Ratio of 20.73x suggests the stock screens as undervalued on this preferred multiple approach.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Valero Energy Narrative

Earlier it was mentioned that there is an even better way to understand valuation, so Narratives are introduced here as a simple tool that lets you attach a clear story about Valero Energy to specific assumptions for future revenue, earnings, margins and a fair value. You can then compare that fair value with today’s price to help you decide whether the stock looks attractive, fully priced or expensive.

On Simply Wall St’s Community page, Narratives are available as an easy interface where you pick or adjust a view on the business, connect it to a forecast and fair value, and then see at a glance how that compares with the market price. Those figures are updated when new earnings, news or guidance arrive.

For Valero Energy right now, one bullish Narrative on the platform ties a higher fair value of about US$265 per share to assumptions such as earnings reaching roughly US$7.0b and a P/E of 12.1x by 2029. A more cautious Narrative uses a lower fair value around US$170 per share, built on earnings of about US$2.7b and a P/E of 19.9x. This shows how different stories and inputs can still be compared on the same price versus fair value yardstick.

For Valero Energy however we'll make it really easy for you with previews of two leading Valero Energy Narratives:

Fair value in this bullish consensus view: US$256.26 per share.

At the recent price of about US$240.34, this narrative frames Valero Energy as trading at roughly a 6.2% discount to that fair value estimate.

Analyst revenue assumption: revenue declines about 1.42% a year.

• Analysts expect profit margins to improve over the next few years, with earnings in this scenario reaching about US$5.4b by 2029 and earnings per share of US$22.51.
• The view also builds in ongoing share buybacks, with analysts expecting the share count to shrink by about 4.42% a year for the next three years, and a future P/E of 15.1x on 2029 earnings.
• Key risks include potential asset impairments, pressure on the renewable diesel segment from regulation and costs, and higher operating expenses, all of which could undermine the earnings path behind this fair value.

Fair value in this more cautious narrative: US$185.51 per share.

At the recent price of about US$240.34, this view frames Valero Energy as trading around 29.6% above that fair value estimate.

Revenue assumption in this case: revenue growth of 9% a year.

• The thesis highlights Valero Energy alongside other large energy stocks that combine free cash flow, dividends and what the author sees as a discount to estimated fair value, but still flags that margins are lower than the prior year.
• For Valero Energy specifically, the focus is on free cash flow per share of US$18.34, a dividend yield of 3.49%, and a dividend coverage ratio of 2.65% as the core of the income case.
• The caution comes from reliance on future price appreciation and dividend income in the context of forecast earnings pressure, with the author pairing upside targets with stop loss levels to manage downside risk if earnings or sentiment weaken.

Do you think there's more to the story for Valero Energy? 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.