Reworking the numbers with a more conservative current free cash flow per share of $3.85, a growth period rate of 1.5%, and a constant period growth rate of 2.0% reveals an intrinsic value around $60.51 per share. Both estimates show that Valero Energy Corporation (NYSE:VLO) is a good deal around $35 per share.
The Competition
The majority of Exxon Mobil Corporation (NYSE:XOM)’s growth comes from its upstream operations. It recently bought into Alberta’s tight oil fields along with its operations in America’s Bakken region. While the majority of the company’s earnings come from its upstream operations, it is still the second biggest refiner in the U.S.
ExxonMobil’s latest free cash flow per share figure of $3.59 and its expected 2014 EPS growth rate of 2.83% (as the first stage growth rate) reveal an intrinsic value of $68.01 per share. Using the firm’s five year EPS growth rate of 5.86% for the first stage rate boosts its intrinsic value to $73.89 and makes its current stock price around $90 a tad more reasonable. ExxonMobil is a strong long-term company with a proven ability to create shareholder value, but at current prices it is not a value play like Valero.
Phillips 66 (NYSE:PSX) was recently spun off from ConocoPhillips, and the company is still trying to rework its operations. Like Valero, it is looking to buy more rail cars to take advantage of cheap North American crude. Still, Phillips 66 has significant international operations and uses a large amount of expensive Brent crude oil.
While Phillips 66 did produce $7.839 in free cash flow per share over the last four quarters, its EPS is expected to decline -8.01% in 2014. Using these numbers, the discounted cash flow calculator reveals an intrinsic value of $108.51. This price is a substantial increase from its current stock price of around $60, but it is safer to wait and see how much its earnings will really fall.
Conclusion
Intrinsic value estimates are helpful guides. Currently Valero is trading at a steep discount to its intrinsic value, even when using more conservative figures. Given ExxonMobil’s current expected EPS growth rate, it is hard to paint it as a deep value play. Phillips 66 is a powerful refiner, but its falling EPS raises questions.
The article Don’t Miss the Value in Valero originally appeared on Fool.com and is written by Joshua Bondy.
Joshua Bondy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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