A trailblazer in the global energy industry, Chevron Corporation (NYSE:CVX) has matched, stride by stride, the Dow Jones Industrial Average so far in 2013, under-performing the blue chip average by only 1.66%.
Chevron is a major player in the global energy industry. The company operates its upstream and downstream segments, and possesses a dominant global presence. Based on market capitalization, Chevron is valued at a monumental $240.61 billion. Chevron Corporation (NYSE:CVX)’s fundamentally strong business model results in the company possessing a TTM profit margin of 10.88%.
With the stock trading within $3 of all time highs, should investors bet on this diversified energy giant, or should they look elsewhere for black gold?
Strengths:
Institutional Vote of Confidence: 61.31% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future.
Historic Revenue Growth: In 2003, Chevron reported revenue of $120.03 billion; in 2012, the company announced revenue of $241.90 billion, representing year over year annual growth of 8.10%, a trend which is expected to sustain into the future with projections placing 2016 revenue at $286.76 billion. This growth has been a result of aggressive investment by the company in new production facilities and strength in energy prices.
Basement Valuation: At the moment, Chevron Corporation (NYSE:CVX) possesses a price to earnings ratio of 8.64 and a price to sales ratio of 0.94, both of which represent a company trading with a basement valuation.
Relatively Low Volatility: Presently, the company holds a beta ratio of 0.77, representing a company trading with considerably less volatility than the overall market.
Strong Cash Flow: In 2011, Chevron generated $39.80 billion in cash flow, giving the company an enhanced level of financial strength.
Diversified & Established Nature: The company employs 61,000, possesses a global presence, and is valued at a fifth of $1 trillion; the company’s diversified and established nature provides investors with a greater level of security and predictability.
Net Cash Position: Chevron Corporation (NYSE:CVX)’s $14 billion of debt is outweighed by its $22 billion of cash and cash equivalents, resulting in a net cash position of $7.1 billion, or roughly $3.60 per share, a financial strength of the company.
Margin Expansion: Over the past decade, the company’s TTM profit margin has expanded from the 5% level to the current 10.88% figure, an extremely advantageous trend for the company.
Weaknesses:
Expenditures Outgrowing Revenue: From 2007 to 2011, capital expenditures have grown 45.15%, while revenues have only grown 43.69%; expenditures outgrowing revenue will lead to margin compression if it persists.
Opportunities:
Dividend Growth: Since implementing their dividend program in 1912, Chevron has consistently raised their dividend payouts and is highly anticipated to continue to do so into the future.
Upstream Segment: The company’s upstream segment, also known as exploration and production, has grown from generating $59.65 billion in 2007 to generating $93.18 billion in 2011, fueled by aggressive investment by the company in major capital projects; further growth in this segment is projected and will fuel overall company growth.
Strength in Energy Prices: Chevron Corporation (NYSE:CVX)’s downstream segment experiences improving margins when energy prices exhibit strength; any strength in energy prices could provide opportunity to the company.
Major Capital Projects: The company’s exploration activities have added 10.5 billion barrels of risked oil-equivalent sources since 2002, and with several major capital projects planned for the upcoming years, each with an expected maximum net daily production of 25,000 barrels of oil-equivalent, the opportunity is presented to fuel growth.
Results for R&D Spending: In 2013, Chevron is anticipated to pour $1.72 billion into research and development; any innovative technologies that results from this investment could lead to increased production and a greater exploration drilling success rate.
Growing Energy Demand: Global energy demand is expected to increase 30% from 2010 to 2040, due to expanding prosperity and a rise in the global population to nearly 9 billion people; Chevron Corporation (NYSE:CVX) is presented the opportunity to meet growing demand and fuel revenue growth.
Threats:
Faltering Energy Prices: Weakness in energy prices could squeeze the company’s margins and threaten business.
Competitors:
Major publicly traded competitors of Chevron include Exxon Mobil Corporation (NYSE:XOM), BP plc (ADR) (NYSE:BP), TOTAL S.A. (ADR) (NYSE:TOT), and Eni SpA (ADR) (NYSE:E).
Exxon Mobil is valued at $406.67 billion, pays out a dividend yielding 2.76%, and carries a price to earnings ratio of 9.33. Exxon is the largest energy company in the world, but is projected to experience flat line growth up until the year 2017. Fundamentally, Exxon Mobil Corporation (NYSE:XOM)’s business model is proven and solid, with a TTM profit margin of 9.62%.
BP plc (ADR) (NYSE:BP) is valued at $137.99 billion, pays out a dividend yielding 4.84%, and carries a price to earnings ratio of 6.21. Much like Exxon, this energy giant is facing several upcoming years of stagnant revenue growth. Over the past five years, BP’s TTM profit margin has faltered as a result of the Deepwater Disaster and the resulting expenditures, and currently sits at the 5.65% level.
TOTAL S.A. (ADR) (NYSE:TOT) is valued at $114.25 billion, pays out a dividend yielding 6.01%, and carries a price to earnings ratio of 10.36. Years of stagnant revenue and earnings growth also faces this French based company. By 2017 the book value of the company is projected to equal the current price of a share, representing substantial growth from current levels. Fundamentally, the company’s business model has been weakening since 2010, and currently possesses a TTM profit margin of 4.77%.
Eni SpA (ADR) (NYSE:E) is valued at $63.76 billion, pays out a dividend yielding 6.14%, and carries a price to earnings ratio of 29.01. This Italian company possesses operations across nearly all aspects of the energy industry, and is projected to grow revenue in the low single digits until 2015. Presently, the stock possesses a price to book ratio of only 1.07. Currently, Eni possesses a TTM profit margin of 6.09%, which has been declining over the past half decade.
The Foolish Bottom Line
Financially, Chevron Corporation (NYSE:CVX) could not be stronger. The company possesses a historic track record of consistent revenue growth, a growing dividend, and a net cash position. Looking forward, the company is likely to draw growth from the major capital projects it has planned and should benefit from meeting growing energy demand. All in all, Chevron earns 3 out of 5 stars, and is a safe and stable long-term investment that will hand investors returns that match the overall market.
Ryan Guenette has no position in any stocks mentioned. The Motley Fool recommends Chevron and Total SA. (ADR). Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Human Energy, Consistent Returns originally appeared on Fool.com and is written by Ryan Guenette.
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