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Chevron: Up and Down, But Ultimately Cheap
Posted by on September 29th, 2010 at 10:04 am, Comments: 0

This 5-year chart of Chevron (CVX) stock looks an awful lot like crude oil prices – and why shouldn’t it? — soaring through June 2008 and then plunging downward.

Chevron Stock Chart

Revenue and profits also soared and then fell, of course: 2009 revenue, $171.6 billion, was off a whopping 37% from the 2008 peak of $273.0 billion. And profit plunged 56% to $10.6 billion, or $5.24 a diluted share, from $24.0 billion, or $11.67.

Seems awfully volatile, but when one looks at some other fundamental investment yardsticks, Chevron begins to look like a good company at a cheap price, the sort of thing YCharts aims to ferret out.

Chevron’s dividend rises regularly.

Chevron Stock Chart

And right now, the payout produces a pretty decent yield.

Chevron Stock Chart

Chevron has a strong balance sheet, with more cash on hand than long-term debt owed.

Chevron Stock Chart

Best of all, it’s pretty cheap right now, with a p/e below 10.

Chevron Stock Chart

That makes it look cheap compared to most other major integrated oil and gas companies, as you can see in this YCharts sector chart. (Put your curser on the dots.)

Chevron is also near the top of oil majors in earnings yield.

Chevron’s exploration and drilling program – it expects to spend $21.6 billion this year on capital expenditures – has helped it push up proven oil and gas reserves to the equivalent of 8.3 billion barrels as of December 31, 2009, 5% higher than a year earlier. Its investments with other parties add another 3.0 billion barrels.

Much of the company’s search for reserves is targeted in Asia, where it is trying to build a top natural-gas supply position. Chevron expects demand in Asia to grow at roughly three times the global average between now and 2035.

Oil prices will bounce up and down, and Chevron’s results will follow along. But over the long haul, it appears the company is positioned to offer strong returns.

Disclosure: No Positions

For-Profit Colleges: Don’t Bet on Uncle Sam Being Too Tough
Posted by on September 22nd, 2010 at 7:53 am, Comments: 0

The for-profit education industry has gotten shellacked in recent months, even as companies’ earnings have been strong.

ESI, EDMC, COCO, DV, CECO Chart

The cause: proposed new rules by the Department of Education, whose loans and grants supply most of the industry’s revenues. The changes would tie schools’ access to federal funds to former students’ success in landing jobs with income adequate to repay their borrowings. Sounds reasonable enough, but quite a fracas has ensued.

The agency wants 45% or more of students to be actively paying down their student loans, not just making minimum interest payments; or, it wants the loan payments to represent 8% or less of a former student’s income. Otherwise a school’s access to federal loans could be restricted, or even cut off entirely if performance against these standards falls far short of the mark.

Enrollment has boomed to 1.8 million at for-profit colleges in recent years, and those students soak up more than $20 billion of federal loans and more than $4 billion in grants. Without that money, it would be a tiny industry, not the growth business that you see here.

ESI, EDMC, COCO, DV, CECO Chart

With the feds threatening to clamp down, some short sellers smell blood and have encouraged the view that the for-profit industry is toast. The shorts, as always, have been active in presenting their case.

Others are critical, too. A recent report by the Government Accountability Office, the watchdog arm of Congress, uncovered fraudulent enrollment practices at some schools. More troubling – though less sensational – was a set of price comparisons the GAO did that showed some for-profit schools’ courses to be crummy deals when compared to, say, community colleges.

The for-profit colleges say they educate a tougher group of students, less well-prepared for higher education and having fewer family resources to help them repay loans. That accounts for the low graduation rates and higher loan-default rates, the industry says. The industry, lobbying against the new rules, has hired some pricey consultants to help it try to beat back the Education Department. It has also taken out ads making the claims that one million students would lose access to schooling. Carolyn, the young dental assistant touting her Everest College (a Corinthian unit) experience in a full-page ad in the Sunday New York Times, didn’t share with us whether she borrowed and, if so, how the payments are going.

Corinthian (COCO), however, noted last month in reporting fiscal 2010 earnings per share more than doubled to $1.65 that its 2008 and 2009 graduates are suffering rising default rates. Corinthian said it can’t be sanctioned under a new default-rate measurement system until 2014, but investors have clearly caught wind of the problems. Corinthian’s p/e ratio is below 4, a sign of strong disbelief in future earnings. And it’s not alone in the low p/e department.

ESI, EDMC, COCO, DV, CECO Chart

Apollo (APOL), the largest company by market capitalization, has been hammered, too, in recent months. But its p/e is still above 12.

APOL Stock Chart

What’s likely to happen? History suggests that industries screaming bloody murder about onerous regulations, whether the complaints are valid or not, tend to get cut some slack. Especially if the industry has made friends in Congress.

Wall Street’s yelping helped to significantly water down the recent round of banking re-regulation. And 20 years ago, the utility industry, warnings of huge losses from the Clean Air Act, won concessions greatly reducing their obligations to install scrubbers on coal-fired power plants. The utility warnings turned out to be highly exaggerated. Count on the for-profit schools softening up some congressman, and maybe even regulators, too.

What’s more, strained capacity among some states’ community colleges and four-year schools also argues for having a healthy for-profit college industry.

For investors with strong stomachs, then, the beaten-down shares of for-profit schools could represent an opportunity. How much of one exists won’t be clear until the Education Department issues its final rules, and Congress decides whether to get involved. Stay tuned.

Disclosure: No Positions

Wal-Mart: Squeezing Harder, Every Day
Posted by on September 9th, 2010 at 9:16 am, Comments: 0

The annual week of vacation at a Midwest beach town, in this case South Haven, Mich., affords the city dweller that most American of cultural experiences: a trip to Wal-Mart (WMT).

An infrequent visitor is impressed by the sheer size of the joint – the company’s more than 2,700 U.S. Supercenters, which are combined grocery and general merchandise stores, average 185,000 square feet each – and by how frighteningly cheap everything is.

Of course, the company is big and cheap, too, built on a scale only the Soviets could have imagined: yearly sales of more than $400 billion and workers numbering more than two million. But unlike the Soviets, the Wal-Mart crowd can manage: they grind out ever-rising per-share profit, even as sales growth has become lackluster.

WMT Stock Chart

As management feats go, it’s surely a neater trick than was managing Wal-Mart during its higher-growth days. But Mike Duke, the CEO, and his fellow magicians, seem to get little respect, with Wal-Mart’s p/e ratio and market cap drifting lower.

WMT Stock Chart

The first six months of fiscal 2011, ended July 31, was another virtuoso performance. Same store sales in the U.S. fell 0.8%. Ugh. But rapid expansion overseas brought in a 15.9% overall sales increase outside the U.S. That allowed Duke & Co. to report an overall 4.4% sales gain for the six months.

Then, by keeping costs from rising as swiftly as sales, Wal-Mart’s profit rose 7.5% for the six months, to $7.2 billion. And by buying back shares to reduce the total outstanding, per-share diluted earnings rose 11.4%, to $1.85, for the six months. Sounds exhausting.

The international sales aren’t yet as profitable as those in the U.S. But finding ways to expand in the U.S. grows more difficult each year. Good locations are spoken for. One doesn’t want to locate Supercenters too close to each other, for fear of cannibalizing sales. And those pesky city councils (egged on by unions) and neighbors (egged on by fearful local merchants) in some burgs organize against Wal-Mart building new stores or expanding old ones.

In its 10-K filing, such impediments to growth are listed as the second risk Wal-Mart faces, right after the generally crummy economy. And there are a handful of states, notably California (Wal-Mart is underrepresented on the retail scene there, with just 209 stores, as of Jan. 31, vs. 443 in Texas) where for whatever reason the company hasn’t converted most of its old-format discount stories in bigger Supercenters. Lost opportunity.

Just in case some consumers forget about Wal-Mart, Duke has upped the ad spending to remind them of every-day-low-prices and other good things. Ad cost was $2.4 billion last year vs. $1.8 billion two years earlier. It helps foot traffic, but sales have still been sluggish.

So, it’s understandable that Duke should focus on the cost side. Wal-Mart always has, building a vast network in the U.S. or about 120 distribution centers, beating down suppliers on price, and getting its money’s worth, and then some, from employees; Wal-Mart took a $382 million pre-tax change in fiscal 2009 to settle 63 class action lawsuit that alleged it shorted people on wages and hours.
So, reading about Wal-Mart’s plan to use its super-efficient trucking operation to pick up goods from suppliers, rather than wait for them to be delivered, one is again amazed at the company’s initiative. It’s being crafty, too, hoping that the suppliers’ remaining customers (hello Target, hello Kroger) get stuck with a heftier transit bill as the suppliers’ fleets become less efficient.

Investors seem less impressed.

WMT Stock Chart

Perhaps they see a low-growth, low-margin company that, for all its calisthenics, is really too big to change much.

WMT Stock Chart

Disclosure: No Positions