I have recently added Chevron (NYSE:CVX) to my watch-list. Current price at the time of this writing is $ 104.89 per share. I'm trying to figure out Chevron's intrinsic value with two approaches.
- Key Value Driver Formula
- Earnings Power Value (Graham & Dodd)
The Value Driver Formula is: Value = NOPAT * (1 - g / ROIC) / (WACC - g)
NOPAT = Net Operating Profit After Tax
g = Growth in Perpetuity
ROIC = Return on Invested Capital
WACC = Weighted Average Cost of Capital
Data below is provided by Ycharts
CVX's TTM (trailing twelve months) NOPAT is $ 17.39B.
Growth in Perpetuity = 3%.
I'll use the 3 year Median ROIC, equal to 14.26%.
WACC equals 8.85%, taking into account a market premium of 6.50% and Beta of 1.20.
EV = (17.39B * (1 - 0.03/0.1426)) / (0.0885 - 0.03))
EV = $ 234.7B
Equity (EV + Cash - Debt) = $ 213.5B
Fair Value (Equity / Shares Outstanding) = $ 113.58
The simplified idea behind Earnings Power Value is dividing earnings by cost of capital.
EPV = Adjusted Earnings x 1/R where R is the current cost of capital.
Adjusted earnings is a bit tricky because Chevron's earnings have been declining due to the current oil market scenario. Diluted EPS (earnings per share) TTM is about $ 9. I'll use $10.50 per year, which is close to earnings in 2014.
EPV = 19.74B * (1/0.885)
Fair Value = $ 118.64
If we average both approaches we get an intrinsic value of around $ 116 / share.
Wall Street analysts have an average target price of $ 113.15.
I won't pull the trigger just yet. For oil stocks in this scenario I'd feel comfortable with a 20% margin of safety. I will consider buying at around $ 94, if the stock gets there.
Value Investing (Greenwald, 2001)
Corporate Strategy and Valuation (Wessels, 2011)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.