The past six months have been a windfall for Valaris’s shareholders. The company’s stock price has jumped 90.6%, hitting $91.79 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Valaris, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Do We Think Valaris Will Underperform?
Despite the momentum, we're swiping left on Valaris for now. Here are three reasons there are better opportunities than VAL and a stock we'd rather own.
1. Long-Term Revenue Growth Shows Momentum
A company’s long-term performance can give signals about its business quality. Even a bad business, especially in a cyclical industry, can shine for a year or so, but a top-tier one should exhibit resilience through cycles. Luckily, Valaris’s sales grew at a decent 10.7% compounded annual growth rate over the last five years. Its growth was slightly above the average energy upstream and integrated energy company and shows its offerings resonate with customers.
2. Low Gross Margin Reveals Weak Structural Profitability
While energy gross margins can be distorted by commodity prices, hedging, and short-term cost swings, sustained margins across a full cycle reflect a producer’s underlying asset quality, infrastructure position, and cost structure.
Valaris, which averaged 21% gross margin over the last five years, exhibiting bottom-tier unit economics in the sector. It means the company will struggle at higher commodity prices than peers with better gross margins. 
3. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Valaris’s demanding reinvestments have drained its resources over the last five years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 5.7%, meaning it lit $5.68 of cash on fire for every $100 in revenue.
Final Judgment
We see the value of companies helping consumers, but in the case of Valaris, we’re out. Following the recent surge, the stock trades at 29.3× forward P/E (or $91.79 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Valaris
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