Valero Energy stock has delivered very strong returns over the past few years, yet the current checks suggest it no longer looks obviously cheap, with the Discounted Cash Flow (DCF) intrinsic value estimate close to the market price while market multiples lean on the expensive side.

• Over the past 5 years, Valero Energy has returned about 5.2x an initial investment, which sets a high bar for any further upside from here.
• Future cash generation from refining margins and capital discipline can support today’s valuation, although any sustained pressure on margins or heavier capital spending could weigh on the intrinsic value estimate.
• Valero Energy scores 0 out of 6 on the broader valuation checks, which implies the stock does not screen as a clear bargain overall 0 / 6.

The issue now is whether Valero Energy’s current share price offers enough compensation for the risks after such a strong multi year run.

Does Valero Energy Look Fairly Valued on Cash Flow?

The Discounted Cash Flow (DCF) model values Valero Energy by projecting the cash it could return to shareholders over time and discounting that back to today. On this view, Valero’s latest twelve month free cash flow sits at about $10.0b, and the model assumes these cash flows gradually decline from current levels rather than grow aggressively.

Using a 2 Stage Free Cash Flow to Equity approach, the DCF points to an intrinsic value of about $323 per share. That sits only slightly below the current share price, implying the stock is about 2.4% overvalued on this cash flow view. The gap is small, so the model is effectively saying that, based on current cash generation and the assumed step down to lower future free cash flow, Valero Energy looks close to fully priced.

On this DCF view, Valero Energy stock comes across as roughly fairly valued with only a mild tilt toward being overvalued.

Valero Energy is fairly valued according to our Discounted Cash Flow (DCF), but this can change at a moment's notice. Track the value in your watchlist or portfolio and be alerted on when to act.

Does Valero Energy Look Pricey on Earnings?

P/E is usually a useful cross check for Valero Energy because earnings are a core focus for investors in a mature refiner. Valero Energy currently trades on a P/E of 13.2x, which sits slightly above the Oil and Gas industry average of about 12.7x and also above a peer average of 9.6x. This already hints that you are paying a premium compared with many similar companies.

The fair P/E ratio implied by the model is about 11.9x, which is below where Valero Energy trades today. That gap suggests the current share price builds in a richer earnings multiple than the level that would typically be expected given its profile and risk factors. This does not mean the stock must revert quickly. It does indicate that, on earnings alone, the valuation leans toward the expensive side rather than offering a clear discount.

On the P/E metric, Valero Energy stock screens as overvalued compared with both the fair multiple estimate and its Oil and Gas peers.

The Valero Energy Narrative: What Would Justify Today's Price?

Simply Wall St Narratives pick up where this valuation puzzle for Valero Energy leaves off. They explain what would need to happen to Valero Energy's future margins, earnings and growth for the stock to be worth materially more or less than today's price, and they sit on Simply Wall St's Community page. Each narrative turns its view of fair value into a thesis about the business that you can track over time, rather than a one off snapshot.

One of the top community narratives on Valero Energy: 23% overvalued

"Continued commitment to capital discipline and shareholder returns, such as the 6% increase in the quarterly cash dividend, could support per share earnings growth through ongoing share buybacks..."

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

The Bottom Line

Valero Energy now screens as roughly fairly valued on a Discounted Cash Flow (DCF) view, with the intrinsic value estimate sitting close to the current share price. Market multiples tell a different story, indicating that the stock appears overvalued compared with both peers and a fair P/E estimate. The broader valuation checks also appear weak.

After a very strong 5 year run, the key question is whether refining margins and capital discipline remain firm enough to support the current premium. The central issue from here is whether that premium still reflects realistic cash flow potential or expectations that have moved ahead of what the business can deliver through the cycle.

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.