Mexico Tariffs Spell Bad News for Chevron Stock

Chevron has too much trade exposure to make CVX stock worth the risk

Chevron stock cvx stock

Source: swong95765 via Flickr (Modified)

Shares of Chevron (NYSE:CVX) have traded lower ever since U.S. President Donald Trump announced tariffs on Mexico in late May and with good reason. Chevron is the third largest U.S. importer of Mexican crude oil, importing around 108,000 barrels of oil per day in February. A 5% tariff on those 108,000 barrels of oil per day would add up over time. The company’s cost basis would rise, margins would fall and profits would ultimately suffer.

Thus, CVX stock has traded lower ever since Trump announced intentions to implement that 5% Mexico tariff on June 10.

In the big picture, CVX stock will likely be stuck in neutral for the foreseeable future. Tariffs threaten higher costs for the oil giant. At the same time, they threaten lower demand through a global economic slowdown. Higher costs and lower demand is a deadly combo. Meanwhile, the stock isn’t expensive. But it’s not cheap, either.

Net net, CVX doesn’t look great here, but it doesn’t look awful. The stock will likely trade sideways for the foreseeable future so long as the valuation remains mixed and the growth fundamentals remain challenged by macro headwinds.

Macro Headwinds Challenge The Bull Thesis

Zooming out, the macro-economic picture behind Chevron stock isn’t all that favorable today and ultimately implies that the growth trajectory going forward will be muted, at best.

Right now, the global economy is one defined by escalating trade tensions and slowing growth. Neither of those things are good for Chevron. On one end, escalating trade tensions result in tariffs, and Chevron is a big oil importer and exporter that has broad exposure to tariffs. Thus, escalating trade tensions will translate into higher costs and lower profit margins for Chevron.

On the other end, slowing global growth results in lower consumer demand for oil. Lower consumer demand will result in slower revenue growth for Chevron.

Ultimately, then, today’s economic backdrop implies slower revenue growth and lower margins for Chevron going forward. That’s a bad combination. Slower revenue growth plus lower margins equals reduced profit growth.

Stocks go as their profits go. Thus, if Chevron’s profit growth slows, gains in CVX stock will moderate, too.

A Mixed Valuation Reduces Downside Risk

The one thing that could save CVX stock from a big downtrend here is valuation. In short, the stock is already fully priced for slower growth going forward, so if/when slower growth materializes, CVX stock may not get hit as hard as it would otherwise.

The valuation here is very reasonable. Chevron stock trades at 15-times forward earnings with a 4% dividend yield. That is a below market average multiple and an above market average yield. Thus, relative to the market, CVX stock is cheaper with a bigger yield. This discounted valuation provides some cushion for reduced profit growth going forward.

If trade headwinds do clear and tariffs go away completely, then Chevron’s growth profile will improve meaningfully. The margin outlook will improve. As will the revenue growth outlook and the profit growth outlook. In that scenario, improving fundamentals will converge on a relatively discounted valuation, and CVX stock could pop in a meaningfully way.

But if trade headwinds don’t clear and tariffs stick around, then Chevron’s growth profile will remain depressed. So long as this remains true, the currently discounted valuation is warranted, and CVX stock will trade sideways.

Right now, it’s anyone’s guess as to what will happen on the trade front. As such, CVX stock seems a bit too risky at the current moment. Investors should probably wait for more clarity on the trade situation before taking a bite into Chevron stock.

Bottom Line on CVX Stock

As a big oil company with global import/export exposure, Chevron is significantly at risk to escalating trade conflicts and the threat of rising tariffs. So long as these risks hang around, CVX stock will have trouble making upward progress. But once those headwinds clear, this stock is cheap enough to where it could stage a sizable rally.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media,

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