As mentioned in my previous post, I'm going to try and have 1 stock analysis report for some popular dividend growth stocks come out prior to their latest earnings release this week. Today we'll look at Chevron Corporation (CVX). Chevron closed on Wednesday 7/25/12 at $106.06.
Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and processing, transportation, storage, and marketing of natural gas, as well as holds an interest in a gas-to-liquids project. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products primarily under the Chevron, Texaco, and Caltex names; transporting crude oil and refined products by pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals, plastics for industrial uses, and additives for fuel and lubricant additives. The company is also involved in coal and molybdenum mining operations; cash management and debt financing activities; insurance operations; real estate activities; and energy services, and alternative fuels and technology businesses, as well as manages interests in 13 power assets with a total operating capacity of approximately 3,100 megawatts.
Analysts expect Chevron to grow earnings 1.17% per year for the next five years and I've assumed they can continue to grow at 3.50% per year thereafter. Running these numbers through a DCF analysis with a 10% discount rate yields a fair value price of $166.27. This means that at $106.06 the shares are undervalued by 36.2%.
Over the last 12 months, CVX's EPS were $13.62 and it's current book value per share is $63.61. The Graham Number is calculated to be $139.62 which means that at $106.06 the shares are undervalued by 24.0%.
Average High Dividend Yield:
Chevron's average high dividend yield for the past 5 years is 4.05% and for the past 10 years is 3.82%. This gives target prices of $88.96 and $94.28 respectively based on the current annual dividend of $3.60. These are overvalued by 19.2% and 12.5%, respectively.
Average Low PE Ratio:
Chevron's average low PE ratio for the past 5 years is 7.52 and for the past 10 years is 7.56. This would correspond to a price per share of $93.85 and $94.34 respectively based off the analyst estimate of $12.48 per share for the fiscal year ending in December 2012. The 5 year and 10 year low PE price targets are overvalued by 13.0% and 12.4%, respectively.
Average Low P/S Ratio:
CVX's average low PS ratio for the past 5 years is 0.65 and for the past 10 years is 0.64. This would correspond to a price per share of $85.28 and $83.47 respectively based off the analyst estimate for revenue growth from 2011 to 2012. The 5 year and 10 year low PS price targets are overvalued by 24.4% and 27.1%, respectively.
Dividend Discount Model:
For the DDM I assumed that Chevron will be able to grow dividends for the next 5 years at the minimum of 15% or the lowest of the 1, 3, 5 or 10 year growth rates. In this case that would be 9.20%. After that I assumed they can continue to raise dividends by 3.50% annually and used a discount rate of 8%. Based on this, Chevron is worth $93.24 meaning it's overvalued by 13.8%
Chevron's trailing PE is 7.79 and it's forward PE is 8.65. The PE3 based on the average earnings for the last 3 years is 11.30. I like seeing the PE3 being less than 15. Compared to it's industry, CVX seems to be overvalued versus BP (5.23) and undervalued versus XOM (10.29) as well as the industry as a whole (10.21). All industry comparisons are on a TTM EPS basis.
Chevron's gross margin for FY 2010 and FY 2011 was 32.06% and 32.25% respectively. They have averaged a 27.90% gross profit margin since 2001 with a low of 23.80% in 2005. Their net income margin for the same years were 9.60% and 11.01% respectively. I like the net income margin to be at least 10% and preferably rising. Chevron is doing well on both fronts with an increasing net margin that is above 10%. They have averaged a 7.48% net margin since 2001 with a disaapointing 1.20% in 2002. Their cash-to-debt ratio for the same years was 0.28 and 1.64. They have plenty of cash on hand to cover debt payments which is great to see in case the global economy turns south again they should be able to weather the storm just fine.
Chevron's shares outstanding have decreased every year since 2001 except for in 2005. Of course in 2005 they increased by 5.96%. They have decreased shares outstanding by an average of 0.71% per year since 2002. In total they've bought back just over 7% of their 2001 shares outstanding.
A negative number for the % change value means shares were bought back by the company and a positive value means the shares outstanding increased.
Chevron is a dividend contender with 25 consecutive years of dividend increases. Their current annual dividend sits at 3.39%. Chevron's annual increase for the last 1, 3, 5 and 10 years has been 13.59%, 9.68%, 9.20% and 9.63%. These numbers are different from the actual quarterly increases since these are based off the dividend paid out during each fiscal year. Their payout ratio has been pretty steady since 2001 with only 3 years where the payout ratio based off earnings was 40% or higher. And only one year was really troublesome with 2002 having a 258% payout ratio. They have averaged a 49.66% payout ratio including 2002, if you take out 2002 they have averaged a 28.70%.
Their FCF per share has been pretty good except that it's not enough to cover dividends. The following chart is one of my favorite graphs to use to see the growth rates in dividends, free cash flow and earnings as well as their relative positions. FCF has rarely covered the annual dividends paid out which gets me a little worried.
Return on Equity and Return on Capital Invested:
Chevron's ROE has averaged 20.72% since 2001 and has recently been increasing. Their ROCI has also been increasing the last 3 years and has averaged 17.9% since 2001.
Revenue and Net Income:
Since the basis of dividend growth is revenue and net income growth I've added a new section to my stock analysis. Here you can see CVX's history of revenue and net income since 2001. Their revenue took a big hit from 2008 to 2009, like most companies, but trended back higher since then. While their revenue hasn't surpassed 2008's number, their net income has passed 2008's valued. This means that they have increased their net income margin which is great to seeand has already surpassed their revenue from 2008.
The chart shows the historical prices for the previous 10 years and the forecast based on the average PE ratios and the expected EPS values. I have also included a forecast based off a PE ratio that is only 75% of the average low PE ratio for the previous 5 years, 10 years or 16 whichever is least. I like to the look to buy at the 75% Low PE price or lower to provide for additional margin of safety. In this case the target PE is 5.64. This corresponds to a entry price of $70.38 based off the expected earnings for 2012. This means that Chevron is trading at a $35.68 premium to this price. I highly doubt you'll see a $70 entry price anytime soon unless the global economy tanks again. That's probably the only chance of getting that entry price. Even though I typically look for 75% of the low PE, I don't think that really applies in this case. That PE ratio would be the second lowest PE they've traded for since 2001. In this case I would raise it up to at least the average of the last 10 years which was 7.5.
The average of all the valuation models gives a fair value of $112.17 which means that Chevron is currently trading at a 5.5% discount to the average fair value. I've also calculated the fair value with the highest and lowest valuation methods thrown out. In this case, the DCF and Avg P/S valuations are thrown out and the new average is $105.37. Chevron is trading at a 0.66% premium to this price.
I would say that overall Chevron is a bit undervalued but isn't a great discount at the current levels.