At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
And speaking of the best ...
With black gold once again trading north of $80, is it finally time to buy the oil majors? If you ask Soleil Securities, the answer is an emphatic "yes" for Chevron
And why should we buy Chevron but avoid its peers?
Soleil on Marathon: According to Soleil, Marathon is embarking on an ambitious capital spending spree which will "lower its return on capital... which already trails peers. "
Soleil on Conoco: In contrast, Conoco's problem isn't with expansion, but contraction. The firm's "divesting of assets [will] be a difficult process, and coupled with a reduced capital budget, we expect the overall earnings power of the company to decline in the coming years."
So what sets Chevron apart from these also-rans? Primarily, Soleil likes the valuation. Arguing that "rising crude oil and natural gas production volumes and higher commodity prices [will] significantly increase Chevron's earnings and return on capital employed," Soleil predicts a closing in the "valuation gap between Chevron and ExxonMobil
But if even Soleil admits that it's breaking from the herd with today's prediction, investors may wonder: Should we run rampant with Soleil, or "stay within the lines?"
Let's go to the tape
To me, the answer's easy. Just look at how well Soleil has done with past picks in the oil patch:
|
Stock |
Soleil Says |
CAPS Says |
Soleil's Picks Beating S&P by |
|---|---|---|---|
|
Valero |
Underperform |
***** |
(56 points) (two picks) |
|
Sunoco |
Outperform |
*** |
(43 points) |
|
Western Refining |
Outperform |
**** |
(41 points) (four picks) |
It's not a record designed to buoy confidence, I think you'll agree. The more so when you consider the analyst's long-term record in this industry according to CAPS -- 16 recommendations made over the last three years, of which fully 69% have failed to even match the market's returns.
The record and the rating
Now, I'm not saying there's no sense whatsoever in Soleil's Chevron endorsement. Basically, the analyst is arguing that Chevron's 9.5 P/E ratio looks more attractive than Exxon's 11.8. And when you consider that Chevron also boasts a higher dividend yield (3.5% versus Exxon's 2.3%), and Exxon insiders have been unloading shares like mad -- selling off more than 7% of their holdings over the last six months, versus no insider selling at Chevron ...
Well, there's clearly a case to be made for Chevron offering a better value than Exxon today.
I just don't think it's a good value in and of itself. Why not? Reviewing the company's financials for the last five years (to include both boom times and bust), it becomes apparent that Chevron is incapable of generating free cash flow anywhere near what its "net income" under GAAP would suggest. (In fact, the company is running free cash flow-negative for the last 12 months, despite reporting more than $16 billion in "profit.")
Foolish takeaway
Between the fact that its free cash flow runs from anemic to nonexistent, while its growth rate is so low as to make even a single-digit P/E look pricey, I don't see a lot of value in Chevron shares today. Of course, that means there's even less value to be found in Exxon ... which is probably why the insiders are bailing out over there.
