Why I bought Exxon (XOM) over Chevron (CVX) shares (7/15/2015)

First: Key Ratios

Choosing between the two was a hard task especially that I have CVX already in my portfolio. Basing it on history of existence, Chevron had been in business well over 136 years; while Exxon Mobil has 125 years of existence (Chevron, n.d.; Exxon Mobil, n.d.). Ocular inspection of data revealed that CVX has well surpassed XOM. I performed an 11-year CAGR comparison in the following financial performance between the two. These are gross, operating, and ebt margins, net income, return on assets, return on invested capital, debt, and shares outstanding.

1

Observation will conclude that CVX is way better than XOM. However, I give more weight on the company’s book value and free cash flow growth over these metrics.

2

A whopping -197% in CVX’s FCF growth TTM.

TTM, XOM has a DE ratio of .07, while CVX has .16.

Second: CEO Performance

Rex Tillerson, currently at age 62, has been the CEO of XOM since 2006. He replaced Lee R. Raymond when the latter was at age 67. So I am assuming that Rex Tillerson may have five more years left to run this $345.1Billion company. Mr. Tillerson gave a 6.085% (including dividend) CAGR performance concerning XOM’s stock price. From 2005-2014, Mr. Tillerson has given 8.66% CAGR book value growth and -5.36% CAGR free cash flow growth.

On the other hand, John Watson, age 58, became CVX’s CEO since 2010. He replaced David J. O’Reilly when the latter was at age 63. Maybe five more years left for Mr. Watson to run his $177.6Billion company? Mr. Watson gave a 7.7% (dividend included) CAGR stock price performance. From 2005-2014, Mr. Watson provided a 9.68% book value growth and -170.38% free cash flow growth.

It’s clear that Mr. Watson had not given an outstanding free cash flow return to his shareholders.

Third: FCFE ratio

With both companies providing dividend in the past 11 years, I am interested in comparing their FCFE ratio.

XOM clearly won this. A “symmetrical triangle pattern” can also be assumed in the XOM graph that may lead to a breakout in either up or down.

34

Fourth: the Buffett Ratio (>10%)

Over an 11-year period, both companies failed to retain their earnings >10%. XOM was only able to retain 1.67% of its earnings, while CVX has 3.55%.

Fifth: Return on Talent

One of the two things I added to my analysis is how much a company earns per employee hired. This gives me an estimation how a company operates in a competitive environment. This value could also probably give me an insight on how the company would be able to support its future growth. The only problem on this number is that I cannot find a data (besides using Morningstar and Gurufocus) on how many employees are being hired or fired over the years. So I used Marketwatch’s TTM data on this.

Currently XOM earns $388,530Million per employee, while CVX earns $297,388Million. XOM wins.

Sixth: Owner’s earnings

This is another addition to my fundamental screening. I derived this formula from the Oldschool value website (http://www.oldschoolvalue.com/blog/accounting/what-is-owner-earnings/). Interestingly, he was able to figure out how Buffett was calculating this value. I used his Microsoft example as a pattern and had asked my acquaintance in the Philippines who has been a CPA for more than two decades to validate my formula. So I guess I can assume that my calculation would be acceptable.

56

XOM > CVX.

Seventh: Sustainable growth rate (SGR)

According to Investopedia (n.d.), SGR is “the maximum growth rate that a firm can sustain without having to increase financial leverage” (para. 1).
7 8

XOM > CVX.

Seventh: Valuation

Using Morningstar’s data for PE, PBV, PS, and PCF, it appears that XOM is just slightly undervalued compared to its 5-year average (except for PCF, which uses 3-year average).

Data as of 07/13/2015, *Price/Cash Flow uses 3-year average. XOM XOM 5Y Avg* CVX CVX 5Y Avg* S&P 500
Price/Earnings 12.4 11.5 10.3 9.8 19
Price/Book 2 2.5 1.1 1.6 2.8
Price/Sales 0.9 0.9 0.9 0.9 1.8
Price/Cash Flow 9.2 8.2 7 6.1 11.7
Dividend Yield % 3.4 2.5 4.5 3.2 2.2

CVX, on the other hand, has an attractive PE ratio. Maybe it’s because of its recent performance (poor cash flow growth) that Mr. Market gives more discount to it right now. CVX may have overly invested in its Gorgon project that’s why it performed poorly on the FCF growth. See these two interesting articles:

  1. Could Chevron end up with a $27 billion black eye from this project? (2014)

(http://www.fool.com/investing/general/2014/09/07/could-chevron-end-up-with-a-27-billion-black-eye-f.aspx)

  1. UPDATE 2-Chevron sees cost jump at Australia Gorgon LNG project (2013). (http://www.reuters.com/article/2013/12/12/chevron-spending-idUSL3N0JQ46N20131212)

Despite these given facts, some researchers still has CVX over XOM in their preferred stocks-to-buy. See (http://blogs.barrons.com/stockstowatchtoday/2015/07/15/the-oil-market-could-be-oversupplied-for-longer-than-we-previously-anticipated/)

But see this review of The Motley Fool preferring XOM over CVX. See (http://www.fool.com/investing/general/2015/03/07/better-buy-exxonmobil-corporation-vs-chevron-corp.aspx)

Eighth: Target price

Current price (7/14/2015): XOM $83.11/share; CVX $95.55/share

Morningstar the following fair value estimates:

XOM $98/share; CVX $115/share

Value Line has:

XOM low price $100/share, high price $120/share;

CVX low price $120/share, high price $150/share

My calculation gave me:

XOM low price $95.18/share, high price $105.22/share;

CVX low price $100.57/share, high price $106.96/share

*Do not consider a buy or sell advice J

Thank you for reading. I will appreciate your feedback and thoughts on this short review.

Mark Yu.

References

Exxon Mobil. (n.d.). Our history. Retrieved from http://corporate.exxonmobil.com/en/company/about-us/history/overview

Chevron. (n.d.). Company history. Retrieved from http://www.chevron.com/about/history/

Investopedia. (n.d.). Sustainable growth rate. Retrieved from http://www.investopedia.com/terms/s/sustainablegrowthrate.asp#ixzz3fuoQKtBt

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s