Exxon Mobil Corporation (XOM), ConocoPhillips (COP): Is Chevron Corporation (CVX) Destined for Greatness?

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:CVXfit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Chevron Corporation (NYSE:CVX)

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 Chart

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

Source: YCharts. * Period begins at end of Q2 2010.

CVX Return on Equity Chart

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

Source: YCharts. * Period begins at end of Q2 2010.
** Chevron Corporation (NYSE:CVX)’s trailing 12-month free cash flow is $3 million, effectively zero at this scale.

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.