Company of the Week: Chevron Corp $CVX

image (12)The ModernGraham approach to investing has multiple layers to it.  Regular readers will be familiar with the first two steps; the first is to determine if the company is suitable for the Defensive Investor or the Enterprising Investor, and the second is to compare the price to the intrinsic value through quantitative analysis.  The next step in the analysis is to review the company’s management and other qualitative factors to determine how the company may compare to other companies that pass the first two steps.  In this Company of the Week series, we will delve into more detail about a specific company that performed well in the first two areas.  This week, the company chosen, Chevron Corp, is currently significantly undervalued based on the ModernGraham valuation model.


Results of Recent Valuation

Please be sure to review ModernGraham’s latest valuation of Chevron Corp in detail, but here is also a summary:

Chevron Corporation qualifies for both Defensive Investors and Enterprising Investors.  The Defensive Investor is only concerned with the low current ratio, and the company by default also qualifies for the Enterprising Investor.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors through a review of ModernGraham’s valuation of Exxon Mobil (XOM) and ModernGraham’s valuation of Conoco Philips (COP).  From a valuation side of things, the company appears undervalued after growing its EPSmg (normalized earnings) from $8.58 in 2010 to an estimated $11.17 in 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 1.27% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.

Further Analysis

Price trend compared to the market

In the following chart, it is clear that recently the market has not viewed Chevron in a very favorable light.  In Chevron’s case that means the price has been driven down, but the earnings continue to demonstrate strong value.  Intelligent Investors know that the price trend has nothing to do with value, but this portion of an analysis can be useful in trying to understand Mr. Market’s movements.

CVX Chart

CVX data by YCharts

Earnings Per Share

The next chart shows Chevron’s earnings per share over the last 20 years.  At first glance, the reader will notice the recent drop in earnings over the last couple of years, and a speculator would conclude the company is on another downward trend and end the analysis there.  But it is important to see the overall trend in the earnings, which indicate an upward movement over time.  Notice that even with the significant swings, it is easy to extrapolate an upward trajectory.  This conclusion is supported further in an analysis of the average earnings, a measure on ModernGraham called EPSmg.  Chevron has seen a rise in EPSmg from $8.09 in 2009 to an estimated $11.17 for 2014.

CVX EPS Diluted (TTM) Chart

CVX EPS Diluted (TTM) data by YCharts

Price to Book

In another confirmation that Chevron would seem to be an excellent value at this point in time, the price to book ratio is well below where it has normally been seen in the last 20 years.  As a result, it is possible we could see Mr. Market turn around and start pricing the company higher.

CVX Price to Book Value Chart

CVX Price to Book Value data by YCharts


Dividend payments should be a critical part of any intelligent investment analysis.  There is no better way to ensure a return on investment than through dividend income.  With Chevron, it is clear the company places a high priority on its dividend payments, and the company has demonstrated commitment to frequently raising the dividend amount.  In fact, the dividend is approximately five times the size it was 20 years ago.  If that trend continues, as it should, the company would appear extremely attractive today.

CVX Dividend Chart

CVX Dividend data by YCharts

ModernGraham Conclusion

Chevron is a very intriguing company for both Defensive Investors and Enterprising Investors to consider.  In addition, the quantitative analysis shows the company to be significantly undervalued.  It is possible that Mr. Market has overreacted to any perceived troubles the company has had in the recent past, speculating that the company’s recent dip in earnings demonstrates a long-term change in the company’s prospects.  However, as has been seen time and time again, large companies often have the resources to weather the ebbs and flows of business competition and that may be the case with Chevron as well.

Management Tenets

Warren Buffett has promoted looking at some key management tenets, and I’d like to leave it up to readers to discuss how JP Morgan fulfills (or fails to fulfill) these qualities.  Please discuss the following in the comments below:

  1. Is the business simple and understandable?
  2. Does the business have a consistent operating history?
  3. Does the company have favorable long-term prospects?
  4. Is management rational?
  5. Is management candid with shareholders?

Disclosure:  The author did not hold a position in any company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

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