I am big believer in assessing investment possibilities by looking at relative value. Sometimes I am amazed to find two companies in the same industry that seem flip flopped in how investors are assigning value to them. A great example of this is in looking at the two biggest domestic oil majors, Exxon (XOM) and Chevron (CVX). The market is assigning an approximate 25% premium to Exxon based on trailing and forward PE over Chevron, even though the latter is the superior investment.
10 reasons CVX is a better investment than XOM:
- Chevron provides a 3.5% dividend yield versus just 2.7% for Exxon.
- More importantly, Chevron has increased its dividend payouts at an average of 12.5% annual clip over the past five years compared with just 7.5% at its bigger cousin.
- Thanks to Exxon's ill-timed 2010 $40B acquisition of XTO Energy, the company has a higher percentage of reserves in less valuable natural gas (51% Gas/49% Liquids) than Chevron (43% Gas/57% Liquids).
- This has also showed up in production figures where Exxon's production ratio is 54% liquids versus the 69% ratio Chevron is running at.
- This explains the discrepancy in growth rates. Analysts expect 4% to 5% revenue growth over the next two fiscal years for Chevron, versus flat sales at Exxon.
- Over the past five years, CVX has averaged 8% annual EPS growth versus flat growth in that time span at XOM.
- Despite having inferior reserves the market is assigning a value of 2.53 times book value to Exxon version 1.63 times for Chevron.
- The market is assigning a value of 7 times operating cash flow on Exxon, yet just over 5 times OCF on Chevron.
- Chevron is much less exposed to the volatile refining segment than is Exxon, where Exxon produces more than three times as much refined product.
- Exxon is approximately 10% under its median analysts' price target of $93, versus Chevron's 20% discount to its median analysts' price target of $125 a share.
Disclosure: I am long CVX.