In this article I take a look at Chesapeake (CHK) and Chevron (CVX); two energy companies that may offer investors upside potential that outweighs the risks.
We'll use the management effectiveness ratios, book value-share, price-sales and price-book value to evaluate Chevron and Chesapeake.
Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.
European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain. Further, the elections in Greece this weekend are providing investors with a reason to worry.
Investment Thesis
Chevron
Investors should accumulate shares of Chevron on valuation. Book value-share is increasing over the last few quarters and management is effective based on the management effectiveness ratios.
Although the macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline further, Chevron's valuation suggests limited downside.
Some investors may want to protect long positions by buying put or selling call options.
Chesapeake
Chesapeake's management isn't effective based on the management effectiveness ratios. The valuation may be near a trough, but I wouldn't invest in Chesapeake.
Rating System
Buy - Be long
Neutral - No position
Sell - Be short
(The ratings, research and analysis in this article should be considered as starting point for further research.)
Chesapeake - Neutral
Company v. Industry
- Return on Assets (TTM): 4.77 v. 12.52
- Return on Investment (TTM): 5.75 v. 17.56
- Return on Equity (TTM): 13.42 v. 18.69
According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are less than current liabilities; the firm is illiquid. The financial leverage ratio is just over two.
Total revenue in the first quarter, compared to the year-ago quarter, increased substantially. The increase is mostly attributable to revenue from oil and gas.
In the first quarter of 2012, earnings were high quality; although, cash from operations wasn't enough to cover cash used in investing. Additionally, the firm is generating cash from financing. Cash from financing is from credit facilities borrowing and sales of assets.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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The share price is declining; a declining share price is bearish.
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Price-sales is declining; the enterprise is getting cheaper, although, the decline is mostly caused by a decline in share price, not an increase in sales.
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Price-book value is declining; the enterprise is getting cheaper, although, the decline is mostly caused by a decline in share price, not an increase in book value.
Chevron Corp. - Buy
Company v. Industry
- Return on Assets (TTM): 13.31 v. 5.68
- Return on Investment (TTM): 16.02 v. 6.90
- Return on Equity (TTM): 23.05 v. 9.48
According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are greater than current liabilities; the firm is liquid. The financial leverage ratio is under two.
Total revenue in the first quarter, compared to the year-ago quarter, increased. The increase is mostly attributable to revenue from sales and other operating revenue.
In the first quarter of 2012, earnings were high quality. Cash from operations was enough to cover cash used in investing and financing activities.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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The share price is increasing; although, recently the share price has declined.
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The enterprise is getting cheaper on a price-sales basis and could be near a bottom.
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Price-book value is declining and is near the 2011 low. The valuation metric may be nearing a bottom.
Macro Environment
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ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.
The pace of job growth has slowed in recent months and may stabilize at low levels.
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CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.
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European Union services PMI is declining and should increase in the coming months.
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European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
