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# Chevron Looks Almost Attractive

|Includes: Chevron Corporation (CVX)

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.

1. Key Value Driver Formula
2. 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.

Sources

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.