Why Chevron Is the Ideal Low-Risk Investment

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Source: Thinkstock

Source: Thinkstock

Over the past few years, value investors have almost unequivocally leaned toward Chevron (NYSE:CVX) as their favorite integrated oil stock among the other largest options:

It has been growing its profits and dividends rapidly while trading at a very reasonable high single digit to low double digit price to earnings ratio. However, over the past couple of quarters Chevron’s leadership seems to be waning. While the entire integrated oil space is experiencing stagnant profits, Chevron in particular is seeing sharper declines than its peers. Furthermore, we are also seeing the company’s production decline.

But is this a reason to sell? I think that if we take a closer look at the company’s numbers, and if we compare them to its valuation, we will find that Chevron is not as weak as the headline earnings figures might lead one to believe.

In the first-quarter, the company reported $51 billion in revenues versus $54.4 billion in revenues in the first-quarter of 2013 — this is a 6 percent decline. But while net profits declined from $6.2 billion to $4.5 billion — a 27 percent decline — the company’s gross profits actually grew slightly from $19.4 billion to $20.1 billion. The reason for the disparity was a huge spike in SG&A expenses, which should be a one time occurrence.

Furthermore, if we look at Chevron’s increase in gross profits, this is due to higher oil and gas prices. The decline in total revenue is due to a decline in production. But this decline appears to be the result of the company’s assets in Kazakhstan. This decline was attributed to poor weather, which should be a one-time occurrence.

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