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Monday, August 21, 2006

Long Term Long on Chevron (CVX) or Exxon Mobil (XOM)?

By CrossProfit

In an article published 8/17/06 Hilary Kramer (the other Cramer) from AOL published an article comparing Chevron (CVX) with Exxon Mobil (XOM). Her conclusion was that Chevron’s future growth potential was better than Exxon Mobil’s due to the massive size of Exxon Mobil.

We like CVX and agree that high oil prices should continue to generate above normal earnings for Chevron.

However we shall expound upon two points.

1) CVX has higher exposure to several risky areas in the world. Venezuela is becoming a serious problem.

2) Exxon Mobil (XOM) on the whole or as a percentage of its business, has less exposure to high risk areas. This is undisputed unless you view Qatar and Canada as high risk locations, we do not.

Hilary stated that XOM can not possibly grow as fast as CVX simply because it is already nearly three times the size of CVX. In our opinion this has been proven to be a fallacy over the past 3 years.

In general when one hears that smaller companies grow faster than larger ones, this is in reference to a company that a miniscule bump in revenue turns into big percentages. For example; a company that has sales of $10 million dollars could grow 50% by increasing sales by $5 million. A company that has sales of $10 billion dollars would have to increase sales by $5 billion in order to achieve the same growth rate. Obviously it is easier to add $5 million in sales than to add $5 billion.

CVX and XOM are both mega cap corporations. It is just as difficult for CVX to grow 5% as it is for XOM. It is just as difficult for CVX to add $5 billion in sales as it is for XOM to add $15 billion. They are both members of the same clubhouse, neither can be considered small or micro cap!

Further comparison as of 08/17 reveals the following;

CVX’s market cap = 146 billion, trading at a trailing PE 0f 9.1 with a dividend yield of 3.2%.
XOM’s market cap = 405 billion, trading at a trailing PE of 10.7 with a dividend yield of 1.9%.

The question is whether CVX really is the better choice. On the surface CVX stock looks more attractive because it is trading at a lower multiple (9.1) and is paying a higher dividend. Sometimes lower multiples and higher dividends portray weakness. Which one is it? Further analysis reveals the complete picture.

At CrossProfit we emphasize fundamental analysis and delve into technical analysis only upon completion of rigorous fundamental analysis. The CrossProfit evaluation line is based on fundamentals.

The following are some of the fundamentals from our proprietary research/analysis.

Reserves Replacement:
CVX = 58% (not good at all, hampers future growth)
XOM = 105% (enables future growth)

Reliance on U.S. Economy:
CVX = 45%
XOM = 31%
(Upon a slowdown in U.S. consumption CVX is more likely to take a hit.)

Unexplained / Unquantifiable Activities:
CVX is reducing holdings in Europe and Scandinavia.
XOM is rapidly expanding in LNG and deep sea drilling. (Not yet proven to be cost-effective although XOM must have done their homework. At CrossProfit we can not view this as a positive factor until the figures are in.)

2006 & 2007 Projected Earnings Growth:
CVX, 2006 = 19% & 2007 = 1%
XOM, 2006 = 18% & 2007 = 6%
Note: We recently revised downwards XOM 2006 earnings growth from 21% to 18% due to the Alaskan pipeline fiasco. (XOM has a 34% stake in the BP project.)

CrossProfit Evaluation Line (meaning buy below the line and sell above the line):
XOM EOL 03/07 = 75.80
CVX EOL 10/06 = 65.30

For those that are unfamiliar with the term, EOL = end of line. The evaluation line is a twelve month forward looking line that specifies a risk/reward evaluation factoring in market volatility and determines whether or not an investment opportunity exists. Towards the ‘end of the line’ the line is usually less accurate as the evaluation was based on data available a while ago. In plain English, the CVX evaluation line is less reliable because it ends in 10/06.

Based on the above, XOM has a 10-12% upside and CVX is currently slightly overvalued. All data excludes dividends.

Sorry Hilary my esteemed colleague, but we differ on this one.

Disclosure: This article was written by a CrossProfit analyst and reflects the opinion of CrossProfit is not affiliated with AOL or Hilary Kramer.

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