Over the past six months, Valaris’s shares (currently trading at $84.73) have posted a disappointing 14.5% loss, well below the S&P 500’s 13.5% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Valaris, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Valaris Not Exciting?
Despite the more favorable entry price, we’re cautious about Valaris. Here are three reasons why VAL doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Shows Momentum
Cyclical sectors like Energy often flatter weaker operators during favorable price environments, but a longer-term lens separates those from businesses that can consistently perform across market cycles. Over the last five years, Valaris grew its sales at a decent 12.6% compounded annual growth rate. 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
In a single quarter or year, gross margins in the sector can swing wildly due to commodity prices, hedging, or changes in labor costs. Over a multi-year period across different points in the cycle, gross margin differences can signal whether a company is a structurally-advantaged producer (“rock” quality, takeaway, operating costs) or not.
Valaris, which averaged 21.5% gross margin over the last five years, exhibited 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 5.8%, meaning it lit $5.80 of cash on fire for every $100 in revenue.
Final Judgment
Valaris isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 13.5× forward P/E (or $84.73 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We’re pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the most dominant software business in the world.
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