NEW YORK (TheStreet) -- Previously, I have expanded upon the musings of Jim Cramer's CNBC show "Mad Money." Specifically, I shared my views on this Web site about Walgreen (WAG) and CVS (CVS) - Get CVS Health Corporation Report and Nike (NKE) - Get NIKE, Inc. (NKE) Report. Both times effectively mirroring Cramer's sentiment, but perhaps I expanded upon his one or two liners a bit.
Today I would like to investigate a recent comment related to oil giants
. The question was about XOM and
was as follows: "I see no reason to be in Exxon. I'd rather be in Chevron."
Once again, I basically agree with his statement. However, indicating that there's "no reason to be in Exxon" seems a touch oversimplified. What if one had a low cost basis in XOM and the resulting taxes and transaction fees offset the implied advantage of CVX? Or perhaps you believe that the
will turn out worse than anticipated.
All I'm saying is that one or two line statements likely need both clarity and context. Instead, I believe Cramer actually meant something along the lines of: "Both XOM and CVX are great companies; yet, I believe that CVX presently provides a better investment opportunity." Perhaps I'm mistaken, but in any event it's always useful to dig into the underlying reasoning behind the suggestions.
Below I have included the fundamental analyzer software tool of
to demonstrate Exxon Mobil's operating results for the last 15 years. Here we see that -- despite a noticeable dip in earnings during the last recession -- Exxon has still been able to maintain a robust pace of earnings (orange line) at just over 12% a year. In addition, we can see that the dividend (pink line) has been both increasing and sustainable.
In turn, an investor would expect rather healthy return results as well. This is precisely what we see -- XOM was able to provide total return results of about 7.6% a year, or roughly double the return of the
during the same period. Additionally, an investor would have received a little over half of the initial capital back in the form of dividend payments.
Note that return results trail the business results of Exxon because of P/E compression. That is, in 1999 Exxon was trading at about 27 times earnings against today's much lower multiple of 11. Despite this headwind, both the business and return performance of Exxon were quite impressive over this time period.
Moving to Chevron, we see a similar story. Instead of growing earnings by 12% a year over the last decade and a half, CVX was able to increase its business results by about 15% a year. In addition, Chevron's management also demonstrated a strong propensity to increase its dividend through the years.
Much in the same manner as Exxon, Chevron's total return results were quite strong. In fact -- at roughly 9.3% a year -- they were even stronger. Yet, also notice that the same P/E compression caused a Chevron investor's total return to trail the business results of the company. Specifically, the P/E dropped from about 28 to today's mark of about 10. Still, the business performance and return results of both companies has been quite solid.
So while one might suggest that CVX has had better return and business results in the past, it hardly seems fair to indicate that XOM has been a subpar partnership. In addition, one might point to things like Exxon's superior historic buyback program as a less talked about advantage. For example, as seen below, Chevron has been able to decrease its common shares outstanding from about 2.14 billion in 2003 to today's mark of about 1.93 billion, roughly a 1% yearly decrease.
However, during the same time Exxon was able to decrease its common shares outstanding from about 6.57 billion in 2003 to today's 4.4 billion mark, or roughly a 4% yearly decline. Moving forward, one may believe that Exxon's ongoing
could prove more effective than
. Interestingly, both companies have an open-ended platform for buying back shares.
But, of course, assessing whether a company is fit as an investment partnership is more about the future than the past. Although history can serve as an important foundation, it's fundamental to consider a company's ongoing prospects. A complete view into each of these companies is beyond the scope of this article, but luckily F.A.S.T. Graphs provides a reasonable starting place.
Today, if we look at the comparative valuations of two companies, XOM is trading at a P/E of around 11, while CVX is trading at a P/E around 9. From the onset, there at least appears to be a valuation bias towards CVX. Yet, it is important to note that XOM has traded with a "normal" P/E around 15 during the last decade and a half, while CVX has been trading with a "normal" P/E around 12 over the last 15 years. Below we see that 24 analysts have come to a consensus estimated earnings growth rate of 3.2%.
By turning to
as a double check, one would find a similar estimate. In turn, using default estimates and an ending P/E of 15, the F.A.S.T. Graphs Estimated Earnings and Return Calculator projects a possible annualized return of about 11%. It's important to remember that this is a calculator only, but the projections appear sensible.
In looking at the Estimated Earnings and Return Calculator for Chevron, we see 14 analysts reporting to S&P who come to a consensus estimated earnings growth rate of 6.8%. Once more checking the consensus reporting by
we find a similar number. Thus, the higher growth rate, higher initial yield and same ending P/E leads to a possible five-year estimated annual return of about 16%. Interestingly, a P/E of around 12 for CVX still might place it slightly ahead of the assumptions made for XOM with an ending P/E of 15.
In sum, I agree with Cramer in indicating Chevron presently appears to be a slightly more attractive investment than Exxon. However, that's not to say that XOM isn't worth a further look as well.
After all, it's hard to discount a company that's been growing earnings by double digit growth rates and has increased its dividend for 31 straight years. For that matter, it's hard to discount a company with a baseline possible estimated total return over 10% as well.
Whether your investment of choice is CVX, XOM, a different oil company or a business in a different sector altogether, the point is that investing preferences change in tandem with valuation changes.
At the time of publication the author was long CVX and WAG.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Charles (Chuck) C. Carnevale is the creator of
Chuck has over 43 years of financial experience and is the co-founder of the earnings and price correlated, powerful fundamentals analyzer software tool - FAST Graphs. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck's work stressing sound valuation has been widely published on numerous financial sites and blogs. Chuck is passionate about spreading the critical message of valuation and prudence in fundamental investing. So much so that regular readers have dubbed him "Mr. Valuation". Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.
Chuck believes that correctly assessing fair value is one of the primary keys of successful stock investing, and he has dedicated his more than 40 years of experience in finance to its pursuit. Chuck agrees with legendary investors such as Warren Buffett, who recognize how important it is for investors in common stocks to possess an intelligent framework for making sound decisions that can keep emotions out of the equation. With making smart stock selections, there is no room for fear and greed.
Chuck was fortunate to learn at an early age that earnings drive long-term stock prices, and that dividends, if any, will be paid out of a company's earnings. This led him to develop FAST Graphs, the fundamentals analyzer software tool that reveals the long-term relationship between a company's earnings and its stock price and dividends over time. Chuck is most interested in the business behind the stock.