In this installment of Using the Value Line Report we will be taking a look at one of the Dow’s iconic energy giants, Chevron Corporation (CVX –Free Chevron Stock Report). This oil and gas producer has a long and storied history (see Dow 30 Profile). Moreover, it is one of the Fortune 500 top five largest companies in the world and is among the elite multinational energy producers. It has been featured and replaced as a member of the Dow 30 a few times over the past few decades, but has held its current spot on the index since February of 2008. This review will examine a few of the company’s investment merits and offer readers some insight into how the Value Line page highlights many of the most essential financial ratios, as well as providing quantitative and qualitative analysis of both historical and projected performance.
However, first we will provide a brief synopsis of Chevron’s operations. A quick look at the Blurb at the center of the page notes that CVX is “the world’s fourth largest oil company based on proven reserves.” The energy outfit’s downstream businesses manufacture and sell products, including, but not limited to fuels, lubricants, additives, and petrochemicals. However, the company is also involved in alternative energy production activities, such as solar, geothermal, biofuels, and wind, to name a few. Geographically, the company’s areas of operations are mainly on the West Coast of North America, the U.S. Gulf Coast, as well as in Southeast Asia, South Korea, Australia and South Africa.
Now, we will identify some of the standout characteristics that ought to appeal to investors seeking exposure to large-cap energy markets. Scanning over to the top left corner of the page, the Ranks box reveals that CVX currently holds a Timeliness rank of 2 (Above Average), which suggests that the equity is likely to outpace the broader market’s averages over the next six to 12 months. Although the stock has recently retreated from an all-time high of $135.10, this offers a good entry point for momentum accounts, as price performance for these shares is expected to pick up the pace in the year ahead. Indeed, the equity enjoyed a strong run over the months prior to hitting its aforementioned peak in August, and this came in spite of lackluster earnings comparisons over the past several quarters.
In fact, after shifting one’s attention over to the Quarterly Earnings box, it is clear that the June period showing was the first year-to-year share-net advance in some time. Nonetheless, investors were somewhat bullish about this issue for the larger part of 2014. These gains were likely propelled by a number of factors, one of which Analyst Jeremy Butler discusses in the Analyst Commentary. Mr. Butler cites “asset sales” as a major contributor to the bottom-line rebound in the second quarter. We concur that divestitures and ongoing efforts to cull underperforming projects ought to pay off and help fund more lucrative growth initiatives. Mr. Butler goes on to highlight several other more promising prospects and that, “steps are being taken to ramp up production in the lucrative Permian Basin”. Therefore, we believe that, while profit-taking likely prompted the equity-price drop in recent weeks, investors are probably more compelled by the aforementioned growth potential here. These positives may well propel the stock in the year ahead.
Another noteworthy factor that contributes to the stock’s appeal is the sizable dividend the company pays. A glance at the Top Label shows that CVX’s yield is 3.3%, which implies that a nice chunk of change can be made at the recent price, not to mention that it is well above the Value Line median. Moreover, given the superlative Safety rank (1; Highest) and Financial Strength rating (A++) here, coupled with the company’s flush cash reserves, it is apparent that Chevron is more than capable of continuing to increase its distributions over the long term. Accordingly, the Statistical Array shows dividends rising nicely over the next 3 to 5 years.
On the downside, however, the outlook for long-term capital appreciation is a bit less exciting. Scanning across the page to the Projections box reveals that CVX’s potential for capital gains from the current quotation is somewhat limited out to late decade. That said, although the financial estimates in the Statistical Array indicate that sales, cash flow, and earnings are set to rise, these advances will probably not be enough to command a particularly attractive Target Price Range (also displayed in the Projections box). Even with the income component, the total return potential does not stand out over the long haul, versus the rest of the Value Line universe.
Still, while this equity may offer more near-term appeal at the moment, we believe this blue chip would prove a fruitful addition to any well-balanced portfolio, at the very least for the solid income stream.