Chevron does not have the profile of a defensive investment based on the requirements of Ben Graham. The Oil & Gas Integrated firm may nonetheless be of interest to more risk-oriented investors who have a solid thesis on the company's future growth. At Market Inference, we remain agnostic as to such further developments, and prefer to use a company's past track record as the bellwether for future potential gains.
Chevron Is Probably Overvalued
Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:
√(22.5 * 4 year average earnings per share (6.21) * 4 year average book value per share (84.177) = $108.45
At today's price of $163.66 per share, Chevron is now trading 50.9% above the maximum price that Graham would have wanted to pay for the stock.
Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.
Positive Retained Earnings From 2008 To 2022, An Acceptable Record Of Dividends, and Decreasing Earnings Per Share
Ben Graham wrote that an investment in a company with a record of positive retained earnings could contribute significantly to the margin of safety. Chevron had positive retained earnings from 2008 to 2022 with an average of $159.1 Billion over this period.
Another one of Graham's requirements is for a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.We are going to compare Chevron's earnings per share averages from the two 'bookends' of the 16 year period for which we have data. The first bookend comprises the years 2007, 2008, and 2009, whose EPS values of $8.77, $11.67, and $5.24 average out to $8.56. Next we look at the years 2020, 2021, and 2022, whose values of $-2.96, $8.14, and $18.28 average out to $7.82. The growth rate between the two averages does not meet Graham's standard since it is -8.64%.
Shareholders of Chevron have received regular dividends since 2009. The company has returned an average dividend yield of 4.4% over the last five years.
Negative Current Asset to Liabilities Balance and an Average Current Ratio
Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Chevron fails on both counts with a current ratio of 1.3 and a debt to net current asset ratio of -0.5.
Conclusion
According to Graham's analysis, Chevron is likely a company of average quality, which does not offer a significant enough margin of safety for a risk averse investor.
| 2019-02-22 | 2020-02-21 | 2021-02-25 | 2022-02-24 | |
|---|---|---|---|---|
| Revenue (MM) | $158,902 | $139,865 | $94,471 | $155,606 |
| Gross Margins | 40.5% | 42.7% | 46.6% | 42.6% |
| Operating Margins | 9.1% | 0.1% | -6.4% | 10.4% |
| Net Margins | 9.33% | 2.09% | -5.87% | 10.04% |
| Net Income (MM) | $14,824 | $2,924 | -$5,543 | $15,625 |
| Net Interest Expense (MM) | -$748 | -$798 | -$697 | -$712 |
| Depreciation & Amort. (MM) | -$19,419 | -$29,218 | -$19,508 | -$17,925 |
| Earnings Per Share | $7.75 | $1.54 | -$2.96 | $18.52 |
| EPS Growth | n/a | -80.13% | -292.21% | 725.68% |
| Diluted Shares (MM) | 1,914 | 1,895 | 1,870 | 1,869 |
| Free Cash Flow (MM) | $44,410 | $41,430 | $19,499 | $37,243 |
| Capital Expenditures (MM) | -$13,792 | -$14,116 | -$8,922 | -$8,056 |
| Net Current Assets (MM) | -$64,200 | -$63,891 | -$80,986 | -$65,857 |
| Current Ratio | 1.25 | 1.07 | 1.18 | 1.26 |
| Long Term Debt (MM) | $28,733 | $23,691 | $42,767 | $31,113 |
| Net Debt / EBITDA | 0.86 | 0.7 | 2.34 | 0.91 |
