• If you are wondering whether Valero Energy is still good value after its recent run, you are not alone. This article looks squarely at what you are paying for each dollar of the business.
• The share price closed at US$200.17, with returns of 7.3% over 30 days, 21.1% year to date, 52.3% over 1 year and 69.2% over 3 years, while the last 7 days showed a 1.2% decline.
• Recent headlines around Valero Energy have centered on its role as a large US refiner and how investors are weighing fuel demand trends against energy sector risks. This backdrop has helped shape sentiment around the shares, which is important context before comparing the current price to various measures of underlying value.
• On our valuation checklist, Valero Energy scores 2 out of 6. We will walk through what that means using a few common valuation approaches, then finish with a more holistic way to think about valuation that goes beyond any single model.

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 model takes the cash the business is expected to generate in the future, then discounts those amounts back to today to estimate what the company 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 US$3.99b. Analysts provide explicit projections out to 2030, with Simply Wall St extrapolating further years. The model includes discounted Free Cash Flow estimates through 2035, generally in the US$4.5b to US$5.0b range each year.

Pulling all those projected cash flows together, the DCF model arrives at an estimated intrinsic value of US$349.88 per share. Compared with the recent share price of US$200.17, this implies the stock is about 42.8% undervalued based on these assumptions and inputs.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Valero Energy is undervalued by 42.8%. Track this in your watchlist or portfolio, or discover 53 more high quality undervalued stocks.

Approach 2: Valero Energy Price vs Earnings

For a profitable company like Valero Energy, the P/E ratio is a useful way to see what you are paying for each dollar of earnings. In simple terms, higher growth expectations and lower perceived risk can justify a higher P/E, while slower growth or higher risk usually point to a lower, more cautious P/E being reasonable.

Valero Energy currently trades on a P/E of 26.00x. That sits above the Oil and Gas industry average of 14.19x and also above the peer average of 21.21x, which indicates the market is currently assigning a higher price tag to its earnings than to many similar companies.

Simply Wall St’s Fair Ratio for Valero Energy, at 23.97x, is an estimate of what a more typical P/E might be given factors such as its earnings growth profile, industry, profit margins, market cap and identified risks. This Fair Ratio can be more informative than a simple comparison to peers or the broad industry because it adjusts for those company specific traits rather than assuming all firms deserve the same multiple.

Comparing the current P/E of 26.00x to the Fair Ratio of 23.97x suggests the shares trade somewhat above this model-based estimate of fair value.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Valero Energy Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. This is where you tell the story behind your numbers by linking your view of Valero Energy's future revenue, earnings and margins to a financial forecast and a fair value estimate, all inside Simply Wall St's Community page that millions of investors use. You can quickly see whether your Fair Value is above or below the current share price, watch that view update when fresh news or earnings land, and compare very different perspectives. For example, one Narrative might lean on a fair value of about US$185.51 with certain growth and discount rate assumptions, and another might point to about US$198.22 based on slightly different revenue, margin, P/E and discount rate inputs.

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.