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By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  1#            FINAN...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  2#I.#CHEVRONS#COST#...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#    ##                                                  3#II.#VALUATIONS##...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  4#III.#FREE#CASH#FL...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  5#This#     is#    ...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  6#Price#to#Cash#Flo...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  7#current#liabiliti...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#      ##                                                    8#In#short,#th...
By#Thien#Huong.#91855K,#June#2012#CMU#Australia#   ##                                                  9#The#time#to#hold#...
ANNEX%1%%Cost%of%equity,%Rfr,%Beta%and%Market%Risk%Premium,%Two%Stage%Growth%Model%      Date          CHEVRON%           ...
ANNEX 2 - Free Cash Flow Model                                                                                     Chevron...
Part%3.%Terminal%Value%and%Intrinsic%value%Estimation Estimated)Value)at)the)Horizon,)2016 Free$Cash$Flow$(2016)          ...
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Chevron corp company evaluation

Chevron Corporation is one of the world's six biggest players in Oil and Gas, Mining industry; by revenues, it is also one of the largest corporations in the world. The company headquarters in California, United States and is active in more than 180 countries with 62,000 employees worldwide and daily production of 2.763 million net oil-equivalent barrels (2010).


STOCKS. Chevron is listed on NYSE as CVX. From 2006 till now, despite the fluctuation of the world economy and especially the stock market, the company's showed an steadily stock price increasing from $USD 61.42 to $96.41.

REPORTS. This report analyses the company focusing on the time from June 2010 to June 2012. Indicators used are Dividend Discount Model, Free Cash Flow Model and some financial ratio benchmarked with the market. Followed the analyses are my recommendations.

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Chevron corp company evaluation

  1. 1. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 1# FINANCIAL MANAGEMENT - COMPANY VALUATION REPORT CHEVRONChevron Corporation is one of the worlds six biggest players in Oil and Gas, Miningindustry; by revenues, it is also one of the largest corporations in the world. The companyheadquarters in California, United States and is active in more than 180 countries with62,000 employees worldwide and daily production of 2.763 million net oil-equivalent barrels(2010).PRODUCTS. Besides its core products from oil and gas, Chevron is developing alternativeenergy sources, including geothermal, solar, wind, biofuel, fuel cells, photovoltaic, advancedand hydrogen fuel. Not only having a big profile for products, the company is also engagedin every aspect of the industries, including exploration and production; refining, marketingand transport; chemicals manufacturing and sales; and power generation.STOCKS. Chevron is listed on NYSE as CVX. From 2006 till now, despite the fluctuationof the world economy and especially the stock market, the companys showed an steadilystock price increasing from $USD 61.42 to $96.41.REPORTS. This report analyses the company focusing on the time from June 2010 to June2012. Indicators used are Dividend Discount Model, Free Cash Flow Model and somefinancial ratio benchmarked with the market. Followed the analyses are myrecommendations.Figure 1. Price and trading volume of Chevron from Jun 2010 - Jun 2012 #
  2. 2. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 2#I.#CHEVRONS#COST#OF#EQUITY,#RISK#FREE#RATE,#BETA##&#MARKET#RISK#PREMIUM#gn.#=#.02.#As#Chevron#is#listed#on#NYSE,#US#market,#we#used#GDP#growth#rate#2.5%#as#the#normal#growth#rate.##RFR.#=#.0025.#Risk#free#rate#is#given#as#high#as#TPbonds#yield.##Rm#=#.1205.#As#benchmark,#annual#return#rate#of#the#market#is#12.046%,#calculation#showed#in#Annex#1.#The#annual#rate#of#return#of#Chevron#is#higher#than#this,#23.01%,#this#is#the#first#indicator,#and#first#of#all#this#is#why#Chevron#is#chosen.##Beta.# From# historical# data,# I# also# calculated# Beta# for# Chevron# and# had# 1.0395,# this#positive#beta#means#that#the#stocks#returns#generally#follow#the#markets.##Next,#I#have#Market#risk#premium#equal#to#(Rm#P#RFR)=.1205M.0025=#.1180#Cost#of#Equity#or#the#required#rate#of#return#Re=#RFR#+#(RFRM#PPremium#).#Beta#=#.1251#As# mentioned# above,# Chevrons# Return# rate# (23.01%)# is# higher# than# its# Cost# of#Equity#(12.52%),#investors#have#an#incentive#to#invest#in#this.##*#Note#to#Cost#of#Equity:#There#is#three#ways#to#calculate#this,#I#chose#Capital AssetPricing Model (CAPM)#with#formula#as#above.## # #
  3. 3. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 3#II.#VALUATIONS##Constant#Growth#Discount#Dividend#Model#(DDM)##Dividend,#or#Do#=#3.6,#as#given#From#Yahoo#Finance.#This#is#the#total#of#its#quarterly#dividend#paid;#or#$3.6#for#every#share#annually.#Given#from#above#we#have:#Re,#the#Cost#of#Equity#as#calculated#above;#gn,#the#normal# ˆgrowth#rate#to#calculate#Constant#growth#DDM#P# P0 # ˆ D (1+ gn ) = 3.6(1+ 0.02) = $34.928 # P0 = 0 rs − gn .1251− 0.02 ˆThis# P0 #implied# that# the# fair# value# of# Chevron# stock# is# $34,928,# pretty# much# lower#than#its#current#market#value#($96.41,#June#2012).##NonMconstant#growth#Dividend#Discount#Model,#or#twoMstage#growth#model# NI EPS − DividentPerShare 27, 008 13.62 − 3.6gs = × = × = 0.615% # TE EPS 122,181 3.6This# gs# value# implies# that# Chevrons# stock# will# grow# at# rate# 61.5%# in# (personally#estimated)#3#years#and#then,#theoretically#it#will#grow#constantly#2%#to#infinity.#At#this#superPgrowth#period,#Chevron#will#price#as#below:# # Do × (1+ gs )3 × (1+ gn ) & % ( ^ Do × (1+ gs ) Do × (1+ gs )2 Do × (1+ gs )3 $ (R e − gn ) P= + 2 + 3 + = 1+ R e (1+ R e ) (1+ R e ) (1+ R e )3 #= 5.1674 + 7.4172 +10.6467 +103.3275 = 126.56Current#market#value,#$94.41#is#28%#lower#than#this#intrinsic#value,#$126.56# #
  4. 4. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 4#III.#FREE#CASH#FLOW#MODEL##The Weighted Average Cost Of Capital (WACC). This is the model where all capitalsources such as long-term debts and its stocks are included, multiplied by its proportionalweight and then all summed up.Based on banks prime lending rate in 2012, the U.S, the Rate of Debts is 3.25% and theTax Rate (from the companys annual report) = 43%, we have:WACC = WeightOfDebt × RateOfDebt × (1− TaxRate) + WeightOfEquity × RateOf Return TL TE #= × (1− TaxRate) + × RateOf Return = .081 TA TADetails(of(calculation(attached(in(excel(file(attached(and(Annex.(((IV.##RELATIVE#VALUATION#ANALYSIS##WITH#P/E#;##P/BV#,##P/CF##,###P/S# # PRICE#TO#EARNINGS#RATIO#(P/E)#Given:#Current#price#of#share#=P=#$94.41#######EPS=#$13.62#######gn#=#2%#P/E#Chevron#=#P/EPS(1+gn)=7.22# #
  5. 5. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 5#This# is# a# simple#approach:#measuring#the#price# paid# for# a# share# to#its# annual# Earnings# Per#Share.#We#see#that#as#Chevron,#7.22,#is#lightly#lower#than#the#mean#of#industry,#P/E#=#7.44.#However#compared#to#stock#of#same#range#of#price#like#Apache#($85.96),#EOG#Resources#($96.38)#or#Exxon#($84.97),#Chevron#has#the#lowest#P/E,#which#means#the#best#of#all.## PRICE#to#BOOK#VALUE#(P/BV)#Book Value of Equity per Share = (Assets - Liabilities)/ Common Stock Outstanding =62. (Given CSO= 1,966,999 mil)P/BV= P/BVPS =94.41/62= 1.55, higher as compared to the industrys is 1.25.As Chevron is an oil company, it has a large amount of tangible assets; its Price to BookValue is an important indicator to measuring its stock (unlike Software or FMCGindustry, normally with low tangible assets, P/BV might not reflect correctly their values).With P/BV = 1.55, higher than the mean of industry, it#implied#investors#are#willing#to#pay#more#for#the#stock,#in#other#words,#they#value#it#more#than#other#stocks.#It#also#has#another#implication#that#the#investors#expect#their#investment#on#Chevron#stock#to#create#more#value#than#other#stocks#in#same#industry. PRICE#TO#CASH#FLOW#RATIO#This#ratio#is#somewhat#similar#to#P/E,#however#it#doesnt#take#in#to#account#earnings#that#is#not#actually#received.#It#reflects#the#real#cash#flow#situation#of#the#company.## #
  6. 6. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 6#Price#to#Cash#Flow#Ratio#per#share=#(NI+Depreciation)/Common#Stock#Outstanding=#4.75#times##Compared#to#its#competitor,#Exxon#with#P/CF=1.32#times,#smaller,#we#can#say#that#Chevrons#current#liabilities#are#covered#by#higher#cash#flow#than#that#of#Exxon.#By#this# quick# look# at# its# cash# flow# level,# or# its# liquidity,# we# know# more# about# the#companys#"health".#Based#on#this#we#can#say#that#Chevron#P/CF#is#good.## PRICE#TO#SALE#RATIO#P/S= P/(Net Sales/ Common Shares Outstanding) = .776.The industrys mean P/S is 1.16.From given formula, this ratio is another way to compare value of stock: Net Sales overyear 2011 of the company is divided by total number of Common shares outstanding.Sales of Chevron in 2011 increased 23% (from $USD 198,198 Mil to $USD 244,371);coupled with its low P/S .776, this makes Chevron an attractive investment.V.#CRITICAL#EVALUATION#This#table#shows#Chevron#and#Exxon#Mobil#financial#ratio#of#2011.# #Liquidation.# Current# ratio# of# Chevron#is#not#as#good#as#that#of# Exxon,# however# its# quick# ratio# is# much# better.# This# tells# the# company# is# capable# of# using# its# cash# or# nearPcash# to# retire# its# #
  7. 7. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 7#current#liabilities.#In#short,#this#is#okay.##Financial#Leverage#Management#Chevron#debts#ratio#11.21#is#a#bit#lower#than#that#of#Exxon,#12.08;##which#means#its#better.#Its#Debt#to#Equity,#however#higher#(7.8# and# 5.41#respectively).#Its#high#and#is# consider# not# good.# However# this# ratio# is# not# a# pure# measurement# of# their# debts#because# it# includes# Operational# liabilities.# Besides,# as# one# of# the# six# biggest# oil#companies# in# the# world,# Chevron# can# have# this# high# ratio# without# getting# into#troubles.##Profitability#Chevrons#Operating#Profit#margin#is##.42;#lower#than#Exxon#with#.51.#The#companys#return# on# Investment# is# .71,# also# lower# than# Exxon# with# 1.05.# Thus,# regarding#profitability#Exxon#is#better#than#Chevron.##Another#additional#information#is#from#the#Chevrons#website#with#their#profitability#ratios#from#2007#to#2011.#As#shown#in#table,#the#company#has#managed#to#maintain#an# increasing# profit.# # After# the# drop# in# year# 2009# with# deep# tail# of# world# financial#crisis,#Chevron#went#up#and#showed#a#better#performance.## ## #
  8. 8. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 8#In#short,#this#is#the#summary#of#the#companys#evaluation## # ##VI.#RECOMMENDATION##As#a#giant#oil#public#company,#Chevron#has#clear#advantages:#its#size#is#huge#and#its#consideredPinelastic# (in# both# demand# and# supply)# products# and# services.# The#company#also#shows#its#direction#for#strategic#development#in#the#future:##exploring#new# energies# beside# oil# and# gas.# It# plans# to# spend# at# least# $2# billion# on# renewable#power#ventures#and#research#between#2010#and#2013.#In#addition#to#developing#its#own# technologies,# Chevron# has# cut# its#energy# use# by# a# third# since# 1992# by#utilizing# hydrogen# fuel# cells# and# solar#panels#at#its#facilities.##After# analyzing# Chevron,# with#consideration# of# it# industry# setting,# as# an#investor#I#would#HOLD#the#stock.## #
  9. 9. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# ## 9#The#time#to#hold#the#stock#depends#but#based#on#historical#data,#its#pretty#sure#that#the#longer#time#of#holding,#the#higher#the#value#of#this#stock#increases.#Thus,#this#can#be#considered#for#longPterm#investment.##%##References:# 1. Lecture#Notes#by#professor#TK#Lim## 2. Yahoo#Finance## 3. http://www.chevron.com/# 4. http://www.energybulletin.net/# 5. http://www.investopedia.com/# #
  10. 10. ANNEX%1%%Cost%of%equity,%Rfr,%Beta%and%Market%Risk%Premium,%Two%Stage%Growth%Model% Date CHEVRON% Ri Dev. S&P500 Rm Dev. Sum%of%dev Jun$1,$2010 63.56 0 0 1,030.71 0 0 0 Jul$1,$2010 71.38 0.12303335 0.10385141 1,101.60 0.06877783 0.05873946 0.00610018Aug$2,$2010 70.03 40.01891286 40.03809480 1,049.33 40.04744916 40.05748754 0.00218998Sep$1,$2010 76.62 0.09410253 0.07492058 1,141.20 0.08755110 0.07751273 0.00580730Oct$1,$2010 78.09 0.01918559 0.00000365 1,183.26 0.03685594 0.02681757 0.00000010Nov$1,$2010 77.2 40.01139711 40.03057905 1,180.55 40.00229028 40.01232865 0.00037700Dec$1,$2010 87 0.12694301 0.10776106 1,257.64 0.06530007 0.05526170 0.00595506 Jan$3,$2011 90.51 0.04034483 0.02116289 1,286.12 0.02264559 0.01260722 0.00026681Feb$1,$2011 99.67 0.10120429 0.08202234 1,327.22 0.03195658 0.02191821 0.00179778Mar$1,$2011 103.26 0.03601886 0.01683692 1,325.83 40.00104730 40.01108567 40.00018665Apr$1,$2011 105.13 0.01810963 40.00107232 1,363.61 0.02849536 0.01845699 40.00001979May$2,$2011 101.56 40.03395796 40.05313990 1,345.20 40.01350093 40.02353930 0.00125088 Jun$1,$2011 99.56 40.01969279 40.03887473 1,320.64 40.01825751 40.02829588 0.00109999 Jul$1,$2011 100.7 0.01145038 40.00773156 1,292.28 40.02147444 40.03151281 0.00024364Aug$1,$2011 96.45 40.04220457 40.06138651 1,218.89 40.05679110 40.06682947 0.00410243Sep$1,$2011 90.35 40.06324520 40.08242715 1,131.42 40.07176201 40.08180038 0.00674257Oct$3,$2011 102.51 0.13458771 0.11540577 1,253.30 0.10772304 0.09768467 0.01127337Nov$1,$2011 101.13 40.01346210 40.03264404 1,246.96 40.00505865 40.01509702 0.00049283Dec$1,$2011 104.65 0.03480668 0.01562474 1,257.60 0.00853275 40.00150562 40.00002352 Jan$3,$2012 101.42 40.03086479 40.05004673 1,312.41 0.04358302 0.03354464 40.00167880Feb$1,$2012 108.15 0.06635772 0.04717578 1,365.68 0.04058945 0.03055108 0.00144127Mar$1,$2012 106.25 40.01756819 40.03675013 1,408.47 0.03133238 0.02129400 40.00078256Apr$2,$2012 105.61 40.00602353 40.02520547 1,397.91 40.00749750 40.01753587 0.00044200May$1,$2012 98.31 40.06912224 40.08830418 1,310.33 40.06265067 40.07268904 0.00641875 Jun$1,$2012 96.41 40.01932662 40.03850856 1,278.04 40.02464265 40.03468102 0.00133552 Mthly Av%Ri%24m 0.01918194 Mthly Av%Rm%24 0.010038 Cov 0.002277 SD%24m 0.06023123 SDm%24 0.046800 Beta 1.039585 Annual%Ri%24m 0.23018331 Annual%Rm%24 0.1205 EPS 13.62Divident$&$Yeild,$Do$= 3.6 Risk$Free$Rate$ 0.0025 Equity 122,181 Market$risk$premium$$$$$$$(Annual$Rm$4$Rfr)$ 0.1180 Required$Rate$of$return$$$$Re$=$rfr$+(Annual$Rm4Rfr)beta 0.1251 Re Normal$growth$rate$ 0.02 % Constant$Growth$DDM$$$$$$$$Po=[Do(1+g$normal)]/Re4g$normal 34.928 USD gs=Self$Sustainable$growth$SSG$=$RR*$ROE$=$(Net$income/Total$Equity)$*$(EPS$4$Div)/EPS$ 0.6150 % # Do × (1+ gs )3 × (1+ gn ) & % ( ^ D × (1+ gs ) Do × (1+ gs )2 Do × (1+ gs )3 $ (R e − gn ) P= o + + + = 1+ R e (1+ R e )2 (1+ R e )3 (1+ R e )3 = 5.1674 + 7.4172 +10.6467 +103.3275 = 126.56 P^^= 126.56 USD %
  11. 11. ANNEX 2 - Free Cash Flow Model Chevron(IS(&(BS( 2,011 2,010 % Sales 244,371 198,198 23.30% RateofDebt 3.25%Part(1(Key(Imputs OperatingCost 193,161 159,810 20.87% Milion&of&dollars& Forecasted(Years OperatingCapital 25,800 24,258 6.36% 2012 2013 2014 2015 2016 TotalOperatingCapital 259,232 231,625 11.92% SalesGrowthRate 23% 25% 25% 25% 25% TotalLiabilities=Debts 87,293 78,958 10.56% Operatingcostsas%ofsales 79% 79% 79% 79% 79% TotalAssets 209,474 184,769 13.37% Growthinoperatingcapital 6% 6% 6% 6% 6% NetIncome 27,008 19,136 41.14% Depreciationas%ofOperatingcapital 50% 50% 50% 50% 50% Depreciation 12,911 13,063 L1.16% TaxRate 43% 43% 43% 43% 43% CurrenAssets 53,234 48,841 8.99% Wacc 0.081 AccruedLiabilities 5,287 5,324 L0.69% LongRunFCFgrowth,Gs 2% 2% 2% 2% 2% Payables 22,147 19,259 15.00% PPE 233,432 207,367 12.57% WACC 0.081 TotalEquity 122,181 105,811 15.47%Part(2.(Forecast(of(CashFlows(During(Period(of(Nonconstant(Growth Re 0.12513 Depreciation/Operating: 7% Historical Forecasted(Years WACC$=$(Total$liabilities/Total$Asset)*$(Rate$of$Debt%)$*$(18$Tax$rate)$+$(Total$ 2011 2012 2013 2014 2015 2016 Equity/Total$Asset)*$Re$$% Sales 244,371 301,301 376,626 470,782 588,478 735,597 EstimatedbasedonPart1OperatingCosts 193,161 238,161 297,701 372,126 465,157 581,447Depreciation 12,911 15,919 19,898 24,873 31,091 38,864 EBIT 38,299 47,221 59,027 73,783 92,229 115,286 Earningbeforeinterestandtax NOPAT=EBITx(1LT) 21,830 26,916 33,645 42,056 52,571 65,713 Netoperatingprofitaftertax TotalOperatingCapital 259,232 275,711 293,237 311,877 331,702 352,787 (Cash,MarketableSecurities,Accountreceivable,Inventories)LLiabilitiesandPayables NetNewOperatingCapital 27,607 16,479 17,526 18,640 19,825 21,085 FreeCashFlow,FCF L5,777 10,438 16,119 23,416 32,746 44,628 NOPATLNetnewoperatingcapital P.V.ofFCFs 0 9,658 13,802 18,552 24,006 30,274 FCFL(1+WACC)
  12. 12. Part%3.%Terminal%Value%and%Intrinsic%value%Estimation Estimated)Value)at)the)Horizon,)2016 Free$Cash$Flow$(2016) 45,521 FCF$(2017)$*1.02 Terminal$Value$at$2016,$TV 735,163 FCF$/$($WACC$C$g$normal)$ PV$of$the$2016$TV 498,709 Terminal$Value$(TV)$/$(1$+$WACC)$^5 Calculation)of)firms)intrinsic)Value Sum$of$PVs$of$FCFs,$2012$C$2016 96,292 Sum$of$5$years$ PV$of$2016$TV 498,709 Calculated)above) Total$corporate$value 595,002 Sum$of$2$previous$lines$ Less:$Market$value$of$debt$and$pfd 87,293 Sum$of$Debt$cua$2011$ Intrinsic$value$of$common$equity 507,709 $Mil) Total$corporate$value$C$Longterm$debt$2011 Shares$Oustanding 1,966,999 Thousand)Intrinsic%Value%Per%Share 258 USD Intrinsic$value$/$Number$of$Outstanding$
  • xixjoon

    Jan. 30, 2014

Chevron Corporation is one of the world's six biggest players in Oil and Gas, Mining industry; by revenues, it is also one of the largest corporations in the world. The company headquarters in California, United States and is active in more than 180 countries with 62,000 employees worldwide and daily production of 2.763 million net oil-equivalent barrels (2010). STOCKS. Chevron is listed on NYSE as CVX. From 2006 till now, despite the fluctuation of the world economy and especially the stock market, the company's showed an steadily stock price increasing from $USD 61.42 to $96.41. REPORTS. This report analyses the company focusing on the time from June 2010 to June 2012. Indicators used are Dividend Discount Model, Free Cash Flow Model and some financial ratio benchmarked with the market. Followed the analyses are my recommendations.

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