Chevron proves to be a fundamentally strong oil company worth keeping in your portfolio
Tuesday, January 19th, 2016
As oil continues to fall, so do many of the oil companies’ stocks.
Over the last few weeks, I have been posting on social media that investors should own a fundamentally strong energy company in their portfolio and now is a good time for long-term investors to invest in energy companies.
The safest of these fundamentally strong companies are the large capitalize companies. They have not gone down in value as much as the small capitalize companies; however when oil turns and goes up, the gains on the smaller will be much greater than the investment gains on the larger companies.
I want to share with you a fundamentally strong energy company, so that as an investor you can understand what I think is a good example and why.
Let’s take a look Chevron Corporation (stock symbol is CVX.) The market capitalization (which is all the outstanding shares multiplied by the share price) of this company is $157 billion.
Chevron’s stock has been as high as $103 a share on May of 2014, and 10 years ago was as low as $56.48. Today the stock trades in the low 80s, and has a 5% plus dividend based on $4.28 paid out on an annual basis.
Let me now explain why I think this is a fundamentally strong company. First off, they are a diversified energy company; in addition to pumping oil, they also refine oil. So as oil has dropped in price, the refinery business has been doing well. However, make no mistake Chevron's main business is pumping oil and refining is a secondary business.
Chevron currently trades at 17.5 times earnings, well above the industry average of 3.8. Price-to-sales for Chevron is also higher than the industry at 1.1, compared with the industry at 0.7.
Price-to-book value is 1.0, well above the industry at .55. And following suit is price-to-cash-flow at 5.2, also higher than the industry average of 3.3.
Normally I don't like a company with all the valuation ratios above the industry average. However in this case with the oil companies beaten-down so much, I can say that the valuation ratios for Chevron, while they are higher than the industry average, are still very good.
As I mentioned earlier, Chevron pays a 5% plus dividend and they use only 69% of the earnings to pay that out. In the recent conference call from the third quarter, the chief financial officer of the company announced an increase in their dividend for 2015, which was a 28 consecutive yearly increase in dividends.
So if one is concerned they are cutting the dividend on this company that does not appear to be the case at all. The dividend on an annual basis cost Chevron about $8 billion. When I looked at their cash flow statement for the first nine months of the year, they had generated $15 billion in cash already. This is another sign that the dividend should not be cut.
One thing very important in the current oil environment is a strong balance sheet, which Chevron has. As of the last quarter, they had $13.2 billion in cash and short-term investments.
The company has a current ratio of 1.3, which means they could pay off 130% of the current liabilities with current assets over the next 12 months. And I love the debt-to-equity for Chevron; it is at 23.2 which is better than half the industry average at 57.3.
The total equity for the company DID decline by about $1 billion, from $156 billion in the quarter one year ago to the current $155 billion.
Many energy companies are not profitable after the fall in oil prices, but Chevron has a net profit margin of 6.1%. They also have a positive return on equity of 5.6%. Both of these numbers are below the industry average, but under the current circumstances with oil being where it is, it’s nice to see that the company is making some profits.
Looking into the future, based on earnings-per-share estimates by the analyst, as with many energy companies the range from the top to the bottom estimate is extremely high. This is because no one knows for sure what will happen with oil in the future.
This is why when I look at the earnings-per-share I like to look at the average, as opposed to one analyst. Looking out to December 2017, the mean estimate for earnings-per-share is $6.57. I feel this is a pretty safe number because the high estimate is $9.09, and a low estimate checks in at $2.70.
Using the $6.57 estimate and an average PE of 16.5, it would yield a target sell price of $108.41. This would give investors a 32% gain if they bought the stock at $82 per share. Add onto that number a dividend of 5% per year, and the total gain over two years is roughly 42% (or annualized at about 21% per year.)
So I hope that everyone can see why this is a good example of a fundamentally strong oil investment, and it should pay off well for long-term investors who can weather the storm!
Do you have a question or a company you'd like me to take a look at? Email me at Brent@WilseyAssetManagement.com!
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.
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