In Focus

Is Chevron Worth Its Stripes?

NOTE: June was a month for buying. So for the whole month, we will be going into detail on the companies that we recently considered for our quarterly Chick "buy." We ended up purchasing stock in Medtronic (MDT) on June 3, 2001, but there were many, many great companies that didn't get our majority vote. We wanted to highlight them as it was a close call and they are still up for consideration for our next buy in September. For more on the companies that were considered, and what we'll be featuring all month, check out our summary.

Chevron (NYSE: CHV) is the second of the two companies I chose to research for our June 4th buy meeting. As was the case with Enron, I failed miserably with my research. Neither company was as difficult to understand or as boring as I had anticipated. Unfortunately, I didn't figure that out until Medtronics (NYSE: MDT) was firmly perched in our Chick's nest. Don't get me wrong, I love our portfolio's newest addition, but if I had known then what I know now, Chevron just may have given it a run for our money!

First of all, owning a stock in the oil and gas industry would have given our portfolio added diversification, as we own nothing in that field right now. In addition, their numbers are downright Chicky, sporting gross and net margins of 41.91% and 13.01%, respectively. Their flow ratio is a lean, mean 0.82. The one real strike against the company is its cash -- or lack thereof. Unfortunately, Chevron fails the cash to debt ratio. Since not every company we Chicks own passes every criteria of our Chicks' Dozen, by no means is this a reason to stop considering it. After all, Medtronics fails to meet our flow ratio preference. The main point is that through our research we're aware of a company's shortcomings and either investigate why it is the way it is, or we merely track it to make sure it's moving in the right direction. I'm afraid I can't tell you why Chevron has so much debt; it may be they just like it that way.

I bet if you asked every person in America with a driver's license what word you associate with Chevron, the overwhelming, if not unanimous, answer would be gas. This would not only be due to the fact that Chevron operates over 8,000 retail outlets, but also because the company has been around since, well, soon after the invention of the automobile. The evolution of the gas station has been nothing less than monumental. Originally only a handful of liveries and dry goods stores sold auto fuel and motorists had to buy it in buckets, filling their tanks using a funnel. In 1907, the Standard Oil Company, which is Chevron today, fulfilled the need for a method that was both safer and easier. That first "station" consisted of a shed, a 30-gallon tank and a garden hose. Incredibly, it drew up to 200 customers a day! A business was born. On Chevron's website they include a chronological history of the service station, following its many transformations thoughout the decades. I strongly recommend it; it's a fun and fascinating read.

Now you may be thinking, what the heck is so difficult to understand about Chevron? Pumping gas may be something we dread these days because of the price tag, but it's definitely something we know and use! For me, it was the word refineries that caused me to freak out. Actually, the concept really isn't that difficult. In its entirety, Chevron Corporation is an international company operating in over 90 countries employing over 31,000 people. Chevron is one of the largest refiners in the U.S. The company explores for and then produces crude oil and natural gas in 25 countries. At its refineries, they then go on and turn the crude oil into products such as motor gasoline, diesel, aviation fuels, lubricants, asphalt and chemicals. Finally, as one of the largest marketers in the U.S., they sell those refined products through their retail outlets. In essence, that's their business! How hard is that? Of course there are a few other segments of their business, such as the Chevron Shipping Company. It has one of the world's largest tanker fleets. It's used for shipping the crude oil and refined products around the globe. I think we can handle that. By the way, the shipping company is ranked at or near the top of the industry based on its environmental and safety record (no Exxon Valdez here!).

In fact, one of the most surprising things I learned about Chevron was its commitment to both people and the environment. I was astounded by how many projects they sponsor in conservation, education and community awareness. They even fund environmental research and donate land for conservation and habitat restoration. Given the numerous awards they've received, it doesn't sound as if they're just giving lip service. For example, in 1997, Chevron, along with three other companies, gave up their exploration rights to approximately 320,000 acres of coastal waters, allowing the first national maritime conservation area on Canada's west coast. In Angola, they have given medical supplies; organized vaccination and health education programs; trained teachers and equipped local schools; and paved roads and drilled water wells. That's certainly not the image we usually have of the big, bad gas companies!