The energy stocks Phillips 66 (NYSE: PSX) and Valero Energy (NYSE: VLO) have seen impressive gains of over 25% year-to-date, leading to concerns about whether they are fully valued. PSX trades at a slightly higher valuation of 0.5x trailing revenues compared to 0.4x for VLO. While Phillips 66 has shown slightly better revenue growth, Valero is more profitable. Investors must consider factors such as historical revenue growth, returns, and valuation when deciding whether to invest in these energy stocks.
Both PSX and VLO have seen significant stock returns over the past three years, with PSX stock increasing by 145% and VLO stock by 270%. However, despite these gains, both stocks have underperformed the S&P 500 in certain years. Consistently beating the S&P 500 has been challenging for individual stocks in recent years, including those in the Energy sector and even megacap stars like Google, Tesla, and Microsoft. In contrast, the Trefis High Quality Portfolio, which consists of 30 stocks, has outperformed the S&P 500 each year over the same period, offering better returns with less risk.
With the current uncertain macroeconomic environment characterized by high oil prices and elevated interest rates, concerns arise about whether PSX and VLO may face a similar situation as in previous years and underperform the S&P 500. Both stocks are currently deemed fully valued, with investors advised to wait for a potential dip before entering the market. Despite strong demand for oil and tight supplies, the positive aspects may already be priced in at this point.
Analyzing key factors such as revenue growth and profitability, it is evident that Phillips 66 has shown better revenue growth while Valero is more profitable and has a stronger financial position. Valero’s operating margin has improved significantly, and its refining margin per barrel is higher compared to Phillips 66. Additionally, Valero has a better financial risk profile with lower debt and higher cash reserves.
Considering valuation metrics like P/S ratios and historical averages, both PSX and VLO are currently trading at higher valuation multiples compared to their historical averages. With the recent uptick in both stocks, it is believed that the positives are already reflected in the prices, and potential investors are advised to wait for a better entry point. While both companies appear fully valued, it is important to also consider how Phillips 66’s peers are faring on important metrics to make informed investment decisions in the energy sector.
