Earnings

A Side-by-side Analysis of Valero Energy Corporation (VLO) and Phillips 66 (PSX)

Valero Energy Corporation (NYSE:VLO) shares are up more than 18.08% this year and recently decreased -0.86% or -$0.7 to settle at $80.67. Phillips 66 (NYSE:PSX), on the other hand, is up 8.00% year to date as of 11/13/2017. It currently trades at $93.32 and has returned -1.18% during the past week.

Valero Energy Corporation (NYSE:VLO) and Phillips 66 (NYSE:PSX) are the two most active stocks in the Oil & Gas Refining & Marketing industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect VLO to grow earnings at a 22.10% annual rate over the next 5 years. Comparatively, PSX is expected to grow at a -7.00% annual rate. All else equal, VLO’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 4.85% for Phillips 66 (PSX). VLO’s ROI is 10.00% while PSX has a ROI of 2.60%. The interpretation is that VLO’s business generates a higher return on investment than PSX’s.

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. VLO’s free cash flow (“FCF”) per share for the trailing twelve months was +0.88. Comparatively, PSX’s free cash flow per share was -0.62. On a percent-of-sales basis, VLO’s free cash flow was 0.51% while PSX converted -0.38% of its revenues into cash flow. This means that, for a given level of sales, VLO is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. VLO has a current ratio of 1.90 compared to 1.30 for PSX. This means that VLO can more easily cover its most immediate liabilities over the next twelve months. VLO’s debt-to-equity ratio is 0.42 versus a D/E of 0.45 for PSX. PSX is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

VLO trades at a forward P/E of 13.03, a P/B of 1.74, and a P/S of 0.40, compared to a forward P/E of 15.18, a P/B of 2.13, and a P/S of 0.50 for PSX. VLO is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. VLO is currently priced at a -1.75% to its one-year price target of 82.11. Comparatively, PSX is -2.34% relative to its price target of 95.56. This suggests that PSX is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for VLO and 2.60 for PSX, which implies that analysts are more bullish on the outlook for PSX.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. VLO has a beta of 1.19 and PSX’s beta is 1.21. VLO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. VLO has a short ratio of 5.23 compared to a short interest of 3.21 for PSX. This implies that the market is currently less bearish on the outlook for PSX.

Summary

Valero Energy Corporation (NYSE:VLO) beats Phillips 66 (NYSE:PSX) on a total of 12 of the 14 factors compared between the two stocks. VLO is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, VLO is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, GPK has better sentiment signals based on short interest.

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