Chevron Corporation is one of the world's six biggest players in Oil and Gas, Mining industry; by revenues, it is also one of the largest corporations in the world. The company headquarters in California, United States and is active in more than 180 countries with 62,000 employees worldwide and daily production of 2.763 million net oil-equivalent barrels (2010).
STOCKS. Chevron is listed on NYSE as CVX. From 2006 till now, despite the fluctuation of the world economy and especially the stock market, the company's showed an steadily stock price increasing from $USD 61.42 to $96.41.
REPORTS. This report analyses the company focusing on the time from June 2010 to June 2012. Indicators used are Dividend Discount Model, Free Cash Flow Model and some financial ratio benchmarked with the market. Followed the analyses are my recommendations.
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Chevron corp company evaluation
1. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 1#
FINANCIAL MANAGEMENT - COMPANY VALUATION REPORT
CHEVRON
Chevron Corporation is one of the world's six biggest players in Oil and Gas, Mining
industry; by revenues, it is also one of the largest corporations in the world. The company
headquarters in California, United States and is active in more than 180 countries with
62,000 employees worldwide and daily production of 2.763 million net oil-equivalent barrels
(2010).
PRODUCTS. Besides its core products from oil and gas, Chevron is developing alternative
energy sources, including geothermal, solar, wind, biofuel, fuel cells, photovoltaic, advanced
and hydrogen fuel. Not only having a big profile for products, the company is also engaged
in every aspect of the industries, including exploration and production; refining, marketing
and transport; chemicals manufacturing and sales; and power generation.
STOCKS. Chevron is listed on NYSE as CVX. From 2006 till now, despite the fluctuation
of the world economy and especially the stock market, the company's showed an steadily
stock price increasing from $USD 61.42 to $96.41.
REPORTS. This report analyses the company focusing on the time from June 2010 to June
2012. Indicators used are Dividend Discount Model, Free Cash Flow Model and some
financial ratio benchmarked with the market. Followed the analyses are my
recommendations.
Figure 1. Price and trading volume of Chevron from Jun 2010 - Jun 2012
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3. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
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II.#VALUATIONS##
Constant#Growth#Discount#Dividend#Model#(DDM)##
Dividend,#or#Do#=#3.6,#as#given#From#Yahoo#Finance.#This#is#the#total#of#its#quarterly#
dividend#paid;#or#$3.6#for#every#share#annually.#
Given#from#above#we#have:#Re,#the#Cost#of#Equity#as#calculated#above;#gn,#the#normal#
ˆ
growth#rate#to#calculate#Constant#growth#DDM#P# P0 #
ˆ D (1+ gn ) = 3.6(1+ 0.02) = $34.928 #
P0 = 0
rs − gn .1251− 0.02
ˆ
This# P0 #implied# that# the# fair# value# of# Chevron# stock# is# $34,928,# pretty# much# lower#
than#its#current#market#value#($96.41,#June#2012).##
NonMconstant#growth#Dividend#Discount#Model,#or#twoMstage#growth#model#
NI EPS − DividentPerShare 27, 008 13.62 − 3.6
gs = × = × = 0.615% #
TE EPS 122,181 3.6
This# gs# value# implies# that# Chevron's# stock# will# grow# at# rate# 61.5%# in# (personally#
estimated)#3#years#and#then,#theoretically#it#will#grow#constantly#2%#to#infinity.#
At#this#superPgrowth#period,#Chevron#will#price#as#below:#
# Do × (1+ gs )3 × (1+ gn ) &
% (
^
Do × (1+ gs ) Do × (1+ gs )2 Do × (1+ gs )3 $ (R e − gn ) '
P= + 2
+ 3
+ =
1+ R e (1+ R e ) (1+ R e ) (1+ R e )3
#
= 5.1674 + 7.4172 +10.6467 +103.3275 = 126.56
Current#market#value,#$94.41#is#28%#lower#than#this#intrinsic#value,#$126.56#
#
4. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 4#
III.#FREE#CASH#FLOW#MODEL##
The Weighted Average Cost Of Capital (WACC). This is the model where all capital
sources such as long-term debts and its stocks are included, multiplied by its proportional
weight and then all summed up.
Based on bank's prime lending rate in 2012, the U.S, the Rate of Debts is 3.25% and the
Tax Rate (from the company's annual report) = 43%, we have:
WACC = WeightOfDebt × RateOfDebt × (1− TaxRate) + WeightOfEquity × RateOf Return
TL TE #
= × (1− TaxRate) + × RateOf Return = .081
TA TA
Details(of(calculation(attached(in(excel(file(attached(and(Annex.((
(
IV.##RELATIVE#VALUATION#ANALYSIS##WITH#P/E#;##P/BV#,##P/CF##,###P/S#
#
PRICE#TO#EARNINGS#RATIO#(P/E)#
Given:#Current#price#of#share#=P=#$94.41#######EPS=#$13.62#######gn#=#2%#
P/E#Chevron#=#P/EPS(1+gn)=7.22#
#
5. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 5#
This# is# a# simple#
approach:#measuring#the#
price# paid# for# a# share# to#
its# annual# Earnings# Per#
Share.#We#see#that#as#Chevron,#7.22,#is#lightly#lower#than#the#mean#of#industry,#P/E#
=#7.44.#However#compared#to#stock#of#same#range#of#price#like#Apache#($85.96),#EOG#
Resources#($96.38)#or#Exxon#($84.97),#Chevron#has#the#lowest#P/E,#which#means#the#
best#of#all.##
PRICE#to#BOOK#VALUE#(P/BV)#
Book Value of Equity per Share = (Assets - Liabilities)/ Common Stock Outstanding =
62. (Given CSO= 1,966,999 mil)
P/BV= P/BVPS =94.41/62= 1.55, higher as compared to the industry's is 1.25.
As Chevron is an oil company, it has a large amount of tangible assets; its Price to Book
Value is an important indicator to measuring its stock (unlike Software or FMCG
industry, normally with low tangible assets, P/BV might not reflect correctly their values).
With P/BV = 1.55, higher than the mean of industry, it#implied#investors#are#willing#to#
pay#more#for#the#stock,#in#other#words,#they#value#it#more#than#other#stocks.#It#also#
has#another#implication#that#the#investors#expect#their#investment#on#Chevron#stock#
to#create#more#value#than#other#stocks#in#same#industry.
PRICE#TO#CASH#FLOW#RATIO#
This#ratio#is#somewhat#similar#to#P/E,#however#it#doesn't#take#in#to#account#earnings#
that#is#not#actually#received.#It#reflects#the#real#cash#flow#situation#of#the#company.##
#
6. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 6#
Price#to#Cash#Flow#Ratio#per#share=#(NI+Depreciation)/Common#Stock#Outstanding=#
4.75#times##
Compared#to#its#competitor,#Exxon#with#P/CF=1.32#times,#smaller,#we#can#say#that#
Chevron's#current#liabilities#are#covered#by#higher#cash#flow#than#that#of#Exxon.#By#
this# quick# look# at# its# cash# flow# level,# or# its# liquidity,# we# know# more# about# the#
company's#"health".#Based#on#this#we#can#say#that#Chevron#P/CF#is#good.##
PRICE#TO#SALE#RATIO#
P/S= P/(Net Sales/ Common Shares Outstanding) = .776.
The industry's mean P/S is 1.16.
From given formula, this ratio is another way to compare value of stock: Net Sales over
year 2011 of the company is divided by total number of Common shares outstanding.
Sales of Chevron in 2011 increased 23% (from $USD 198,198 Mil to $USD 244,371);
coupled with its low P/S .776, this makes Chevron an attractive investment.
V.#CRITICAL#EVALUATION#
This#table#shows#Chevron#and#Exxon#Mobil#financial#ratio#of#2011.#
#Liquidation.# Current# ratio# of#
Chevron#is#not#as#good#as#that#of#
Exxon,# however# its# quick# ratio# is#
much# better.# This# tells# the#
company# is# capable# of# using# its#
cash# or# nearPcash# to# retire# its#
#