Chevron is A Buy!
Chevron Corp. (CVX) stock continues to drop in conjunction with the deflating of the oil and commodities bubbles. The stock is off another two plus percent in today’s trading and is almost twenty percent below its annual high, reached last spring. CVX became attractive to us as value managers as the stock sold off throughout the course of the summer. As the sell-off intensified, its valuation became more and more appealing to Ockham Research.
Chevron is the fourth largest oil company in the world based on proven reserves, has impeccable financial strength, has been buying back its own shares aggressively of late and pays a generous cash dividend (recently increased by 12%) of $2.60 per share per year—a 3.1% yield based on its current price. While continued weakness in the price of oil will not benefit the shares, they have now reached an entry level that is justifiable for long-term investors based on our analysis. No one can predict with certainty where the barrel price of oil will bottom out, but it is a fare assumption that oil prices will not return to levels seen in the early 1990s. Global demand—despite the recent push to find energy alternatives to oil—seems likely to place a solid floor under the price of oil that should auger well in the future for major oil companies such as Chevron, BP (BP), Exxon Mobil (XOM) and ConocoPhillips (COP).
Chevron is spending $23 billion this year to continue to bring new oil fields on-line in disparate places such as Kazakhstan and Angola. Chevron’s fundamentals appear very attractive absent a total collapse in oil prices—which, were it to occur, would likely be very temporary in nature. Rapidly increasing oil usage in developing economies make it likely that oil prices will never return to the era when oil companies were losing money on each barrel sold.
Using Ockham’s valuation metrics of price-to-sales and price-to-cash flow, Chevron shares are worthy of consideration for investors with a long time horizon, a need for dividend income and a reasonable degree of risk tolerance. While the stock’s Beta is .95, meaning that its price action is slightly less volatile than the market as a whole (1.00), it is in a sector which has seen a meteoric rise of late (hand-in-hand with the price of oil) and could over-shoot on the downside were oil prices to plunge dramatically going forward.
CVX’s historical (eight years since the merger of Chevron and Texaco) price-to-sales range is between .89x and .64x. The stock is currently trading at .64x. Its price-to-cash flow range is between 5.53x and 7.67x. Even before today’s price drop, the stock was trading at a price-to-cash flow number 24% below its average price-to-cash flow reading over the past eight years. Thus, we find the current price of these high-quality, income-producing shares compelling and would recommend that patient investors do the research on them as possible candidates for addition to a blue chip portfolio.
Ockham Research Staff @ September 2, 2008
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