August 20, 2016

Management’s Concerns Contradict The Market’s High Hopes For Chevron Corporation


  • Chevron Corporation is expected to see a recovery in ROA’, but management’s concerns about their ability to generate expected returns on capital implies that this may be unwarranted.
  • CVX is trading at a 0.9x V/A’, which is near historical averages.
  • At these levels, the market is pricing in expectations for an increasing ROA’, from 0% in 2015 to 5.4% in 2020, accompanied by 2.6% Asset’ growth.
  • Recent declines in profitability, and management’s concern about their ability to generate expected returns on capital indicate that market expectations for an increasing ROA’ may be too bullish.
  • These factors indicate that equity upside for CVX may be limited.

CVX - PVP - 2016 08

Performance and Valuation Prime™ Chart

CVX has historically seen volatile ROA’, declining from 7% in 2000 to 0.7% in 2002, before rebounding to 6.1% in 2003. ROA’ ranged from 6%-9% levels from 2003-2008, before dropping to 4.3% in 2009. While ROA’ recovered steadily to 7.3% in 2011, it subsequently began declining again in 2012, falling all the way to 0% in 2015 as weakness in oil prices negatively impacted profitability. Meanwhile, the firm’s Asset’ growth has been volatile, positive in thirteen of the past sixteen years, and ranging from -3% to 30%, excluding 59.4% growth in 2000 related to the firm’s merger with Texaco.

Performance Drivers – Sales, Margins, and Turns

It can be helpful to break down ROA’ into its DuPont formula parts, Earnings’ Margin and Asset’ Turns, which are the cleaned up margins and turns metrics used to calculate ROA’. The chart below details both Earnings’ Margin and Asset’ Turns historically, to help us better understand the drivers of the firm’s profitability and performance.CVX - SMT - 2016 08

Valuation Matrix – ROA’ and Asset’ Growth as Drivers of Valuation

When valuing a company, it is important to consider more than a singular target price, and instead the potential value of a firm at various levels of performance. The below matrix highlights potential overvalued or undervalued prices for CVX at various levels of profitability (in terms of ROA’) and growth (Asset’ growth.) Prices that are in excess of 10% equity upside are highlighted in black, and prices representing an excess of 10% equity downside are highlighted in red.

CVX - VM - 2016 08

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