Has Chevron Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Chevron (NYSE: CVX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Chevron.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.9% Fail
  1-Year Revenue Growth > 12% 24.6% Pass
Margins Gross Margin > 35% 28.8% Fail
  Net Margin > 15% 11.4% Fail
Balance Sheet Debt to Equity < 50% 8.0% Pass
  Current Ratio > 1.3 1.64 Pass
Opportunities Return on Equity > 15% 23.7% Pass
Valuation Normalized P/E < 20 6.97 Pass
Dividends Current Yield > 2% 3.1% Pass
  5-Year Dividend Growth > 10% 9.0% Fail
       
  Total Score   6 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Chevron last year, the Big Oil giant has lost a point. A slightly slower pace of dividend growth is responsible for the drop, but the company continued to see strong sales growth last year, and its shares are an even bigger bargain than they were in early 2011.

Chevron continues to benefit from high oil prices. But as the company diversified by picking up a stronger presence in the natural gas industry, low prices there have put a drag on overall results.

In its most recent quarter, Chevron actually disappointed investors. Earnings and revenue came in below predictions, as production grew only slightly while the company's refinery operations produced losses. ExxonMobil (NYSE: XOM  ) also saw similar problems, with production actually falling by nearly 10% and profits from downstream refining and marketing dropping 63%. Those results overwhelmed strength on the exploration sides of the businesses.

Yet longer-term, natural gas could well give Chevron a huge boost. The company is getting into the liquefied natural gas industry with two big projects planned in Western Australia. In order to succeed, Chevron will have to outduel both Exxon and InterOil (AMEX: IOC  ) , which have LNG projects going in Papua New Guinea that will also compete for the potentially lucrative Chinese market. At the same time, it's also playing the other side of the coin by signing on to provide gas for export through Cheniere Energy's (AMEX: LNG  ) proposed Sabine Pass LNG export terminal.

To get a higher score, the thing Chevron needs most is a jump in natural gas prices. That would go a long way toward boosting margins and getting the oil giant the sales growth it needs to become a perfect stock.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

If you like energy stocks, we've got another company that really deserves your attention. Read about it right here in the Motley Fool's special free report on the energy industry and its best prospects -- it's free, but only available for a limited time.

Click here to add Chevron to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On February 04, 2012, at 11:46 AM, MIBS982 wrote:

    A few of the statements in this article relative to LNG are inaccurate. First off, in terms of the two LNG projects (Gorgon and Wheatstone) and having to compete with XOM and Interoil: Chevron has already sold the majority of that LNG under long-term contract to Korea, Japan and China. The contract formulae are already locked in. The only uncertainty is oil price given LNG contracts in Asia are typically linked to oil.

    Second, not sure what the reference to Chevron selling gas to Cheniere is about. Chevron is not one of the four parties (BG, Fenosa, GAIL and KOGAS) who have signed agreements to take gas from the export terminal. Chevron does have an agreement with Cheniere but it is for the import terminal. This is a negative rather than a positive given that import terminal has rarely been utilized and will likely seldom be utilized going forward. Basically, Chevron is flushing a large amount of cash down the toilet every year on this import capacity as it is a use-or-pay structure and they no longer need it.

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