"Value" stocks I've bought recently - CVX

[nodoodahs]

When I bought CVX recently, it had the following ratios on a TTM basis: PE 8.81, PB 2.60, POCF 7.99. I paid 53.58. I anticipate holding for a year or more. Currently it trades at PE 8.59, which compares favorably to the Energy sector's 16.82 or the Integrated Oil and Gas industry's 11.74. The PB comparison is CVX 2.40, Energy 3.17, Int. Oil/Gas 3.04. I bought just after the Unocal announcement, which in my mind made it more of a bargain, since I think the Unocal will pay off over 1-3 years, but the stock certainly dipped on the announce. Nothing magic there, I wasn't trying to time my entry, just serendepity.

The ratios make it cheap, based on industry and market comparisons, relative. Actually a PE of sub-nine is cheap on an absolute basis, that's earnings yield of 11%+ compared to 10 year bond yields of 4% there is a good cushion there.

The business makes "cheap" into "value," however.

Annualized growth rates from 2000 to 2004 are good: revenue 6.6%, income 14.6%, net worth 7.9%. 4-year RO avg E is 18.1% with each year positive. The comparable number for avg Assets is 8.0%. From a solvency standpoint, the DE is better than industry or sector. The interest/(OCF+interest) is only 0.03 and is trending down, as is their effective interest rate. Inventories as a percent of revenue have been falling. The earnings have good quality in that every earnings increase has been matched to increases in OCF. Speaking of OCF, it's been above $4/share each year of the past 5. FCF has been positive 3 of 5 years with 5-yr average of 0.84/share. In short, it's a profitable long-term business with signs of being able to continue.

From a macro perspective, global demand and supply long-term trends for oil and LNG are very good. I don't get into the whole "price of oil" debates over the next 1-3 months, but I am confident the price of oil will be going up significantly over the next 10 years, which will compress the profits of companies that use it, and expand the profits of those that provide it. CVX is positioning for increased LNG production and delivery.

Graham says you should buy a stock if you can say to yourself, if the market were to close for the next five years, you would still want to own a piece of the company. I say amen to that. CVX has the three components that I look for in a value stock.

1. cheap price
2. history of profits and soundness
3. prospects for growth