In an article posted today on ValueExpectations.com, we highlighted a few of the variables that go into AFG’s custom screening process and provided a list of companies that met the criteria of our screen. In this step of the screen process we identified companies that have an attractive valuation, are expected to improve their Economic Margins (economic profitability) and eliminated firms that have management teams that have a tendency to destroy wealth.
One of the firms that met all 3 of the criteria for today’s screen is Chevron Corporation (NYSE:CVX), which currently looks undervalued, is expected to improve its Economic Margins (EMs) at a greater rate than its sector peers and has a management team that has proven to create wealth for its shareholders.
The chart below illustrates Chevron’s “Wealth-Creation Strategy” of growing a profitable business. In the first part of the chart you can see that CVX has maintained positive EMs (earning above its true cost of capital) in every year but one since 2000 at the same time growing its asset base (part 2 of chart). In the 3rd part of the chart it is not surprising that CVX has outpaced the S&P 500 since 2000, when it began earning a positive EM. You can also see a heavy correlation between the growth of their EM level and the level of outperformance relative to the S&P 500 (the higher the EM, the more it outperformed).
Click to enlarge