Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Chevron Corporation (NYSE:CVX) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.
What we’re looking for
The graphs you’re about to see tell Chevron’s story, and we’ll be grading the quality of that story in several ways:
- Growth: are profits, margins, and free cash flow all increasing?
- Valuation: is share price growing in line with earnings per share?
- Opportunities: is return on equity increasing while debt to equity declines?
- Dividends: are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let’s take a look at Chevron’s key statistics:
CVX Total Return Price data by YCharts
Passing Criteria | 3-Year* Change | Grade |
---|---|---|
Revenue growth > 30% | 18.5% | Fail |
Improving profit margin | 20.4% | Pass |
Free cash flow growth > Net income growth | (100%) vs. 42.6% | Fail |
Improving EPS | 47.1% | Pass |
Stock growth (+ 15%) < EPS growth | 97.6% vs. 47.1% | Fail |
CVX Return on Equity data by YCharts
Passing Criteria | 3-Year* Change | Grade |
---|---|---|
Improving return on equity | (2.8%) | Fail |
Declining debt to equity | 36.2% | Fail |
Dividend growth > 25% | 38.9% | Pass |
Free cash flow payout ratio < 50% | Really high ** | Fail |
How we got here and where we’re going
Chevron doesn’t come through with flying colors, as it mustered only three out of nine possible passing grades. One main source of that weakness is falling free cash flow, which has diverged significantly from net income over the past three years, and which may not be able to sustain dividends at the present level. In addition, the company raised a chunk of new long-term debt in 2012, which reflects badly in our analysis. Will Chevron Corporation (NYSE:CVX) be able to move past these weaknesses, or is the oil and gas supermajor drilling a dry hole for investors today? Let’s dig a little deeper to find out.
News of a possible military strike on Syria has forced Chevron and other oil companies to abort under way projects in the region recently. Although Syria is small producer of oil compared to other Middle Eastern countries, rising tensions and potential imbalance are seen as probable disruptions to oil outflow in the Middle East. In the past few days, the anticipated Syrian crisis has already sent crude oil and natural gas prices soaring, which could more than offset the reduced output from aborted projects in the near term.