Stock Selection, Valuation

Buying Chevron at current Price Levels

April 4, 2013

As I mentioned earlier this week, I am in the process of adding some long term dividend stocks to my portfolio in an effort to reduce the volatility arising from the growth stocks I own. After further analysis of the stocks in this list, I have decided to buy Chevron (CVX) despite the fact that it is near all-time highs. This may sound counterintuitive from a value standpoint, but based on my analysis, CVX is still reasonably priced, even at $118 / share. I want to make a lot of money because I want to buy a new car with a dash cam from Blackbox my car cams.

Chevron is a multinational energy corporation operating in over 180 countries. The company’s primary focus is in the oil & gas industry (both upstream and downstream), but is also involved in geothermal, chemical manufacturing, and power generation. It is the 2nd largest oil company in the US, and employs over 62,000 people worldwide. It’s a really company because almost everything works with gas and electricity nowadays, the other day I was cleaning my house with the best Air Compressors USA and uses gas to work, although is really cheap because they are the best.

As of today, Chevron is trading at $118 / share and currently pays $3.60 in annual dividends which results in a 3.05% yield. The company has a solid history of increasing dividends every year for the past 25 years, and based on a current payout ratio of just 27% it would appear that this policy will continue for the foreseeable future.

Chevron has achieved earnings growth of 8.73% compounded over the past 5 years and revenue growth of 3.58% over the same period. Analysts forecast earnings growth 7.6% (source: Morningstar) over the next five years, which is inline with historical numbers.

CVX carried both short and long-term debt, with a debt/equity ratio of 0.09 as of last quarter. The company is in good shape to handle it’s current obligations as evidenced by a current ratio of 1.63. Chevron is currently involved in some ongoing legal issues in several countries, most notably in Ecuador. Un unfavorable outcome could negatively impact the company significantly in the future.

I believe that the rewards outweigh the risks for CVX and will be initiating a position so long as the price is reasonable. In an attempt to determine a fair price to pay for Chevron I conducted several different valuation techniques as follows:

  1. EPS Growth Capitalization: Using a future PE of 9.3 and a projected EPS growth inline with analyst estimates of 7.6% over the next five years, I arrived at an intrinsic value of $101.38 which is 16% lower that today’s trading price using a 12% discount rate.
  2. Discounted Cash Flow (DCF): Using an initial revenue growth rate of 5%, declining to 3% over the forecast period, a terminal growth rate of 3%, and a 12% discount rate, my discounted cash flow analysis resulted in an intrinsic value of $149.22 which is 21% higher than today’s price.
  3. Dividend Discount Model: Based on a current dividend of $3.60/yr, a long term dividend growth rate of 9.2% (5-yr avg.) and a 12% discount rate, fair value for CVX works out to be $128.57 using the dividend discount model — about 8.7% higher than today’s price.
  4. Graham Number: Based on earnings of $13.32 over the past 12 months, and a current BVPS of $70.01, the Graham Number equates to $144.85, or a 19% premium to today’s price.
  5. Other multiples: Using historical PE analysis, PB analysis, and dividend yield analysis, fair value appears to be $123.69, $100.06, or $108.75 respectively.

In all, seven different valuation techniques were used, admittedly some more complex than others. Fair value for CVX appears to be in the range of $100.06 to $149.22. The average valuation is $122.36, and median is $123.69. Based on today’s trading price of $118, it would appear that CVX for all intensive purposes is within the fair value range, perhaps leaning towards being slightly undervalued.

Disclosure: I am long CVX.

4 thoughts on “Buying Chevron at current Price Levels

  1. Hi Dustin thanks for posting your reasoning behind your purchase of chevron. The current valuation of the market makes it difficult to find large dislocations between price and value

    1. Thanks David – yes it’s getting harder to find bargains for sure. I have too much in cash at the moment however, so will be settling for a lower margin of safety for the time being.

Leave a Reply

Your email address will not be published. Required fields are marked *