Chevron’s Profit Nearly Tripled From a Year Ago. Is CVX Stock a Buy After Its Blowout Earnings Report?

Chevron (NYSE:CVX) delivered a blowout third-quarter earnings report. The oil giant's profit nearly tripled from the year-ago period, while free cash flow more than doubled. Those impressive results highlight Chevron's ability to generate enormous amounts of cash when energy markets are favorable.

However, they also raise an important question for investors: Is Chevron stock a buy after its latest earnings report, or are the good times already reflected in its share price?

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Chevron delivered a massive earnings increase

Chevron's third-quarter financial results were spectacular. The oil giant generated nearly $10.3 billion in adjusted earnings, or $5.28 per share. That's almost triple the $3.6 billion, or $1.65 per share, it reported in the third quarter of last year. Meanwhile, the company produced $12 billion in free cash flow, more than double the $4.9 billion it reported in the year-ago period.

The oil company benefited from strong market conditions. Brent crude, the global benchmark, averaged $97 per barrel during the quarter, up from $69 per barrel in the year-ago period due to continued supply disruptions in the Persian Gulf. Those disruptions are having an even more meaningful impact on the global refining market, particularly for diesel. That helped fuel a massive swing in Chevron's downstream business. U.S. downstream earnings rocketed more than 450% to almost $3.6 billion, while earnings from its international downstream operations jumped more than 150% to $1.3 billion. Those strong market conditions helped Chevron offset a nearly 3% decline in production due to disruptions in the Middle East.

Chevron's gushing cash flows enabled it to further strengthen its fortress balance sheet. Chevron reduced net debt by $7.8 billion during the quarter, and by $14 billion since the end of last year. That has enabled it to cut its leverage ratio by more than half (from 1.1x to 0.4x), building further financial flexibility to weather the next downturn in the oil market.

Is Chevron stock a buy?

Chevron is thriving these days. The oil giant is capitalizing on strong market conditions to generate robust cash flows, thereby strengthening its long-term financial position. It's returning meaningful excess cash to shareholders, including $6 billion of dividends and share repurchases during the quarter. Chevron's current dividend yields over 3%, a payout it has raised for 39 straight years. That's highly attractive for income-seeking investors, especially compared to the S&P 500's 1.1% current yield.

The company should have plenty of fuel to continue growing in the coming years. Last year's acquisition of Hess added a long-term growth driver in Guyana. Meanwhile, Chevron plans to invest $7 billion in Venezuela over the next five years to more than double its production there. It's also investing to expand its U.S. operations and in other international areas. These investments position the company to grow its free cash flow at more than 10% annually through 2030 at $70 oil.

The current challenge is Chevron's valuation. Shares of the oil giant have surged more than 50% this year and currently trade near their all-time high. At more than $230 a share, Chevron trades at 16x its trailing 12-month adjusted earnings ($14.25 per share). That's not a screaming bargain, especially since those results likely represent the high point of the current commodity price cycle.

While I think Chevron is a top oil stock, it's hard to justify buying it at its current valuation, given oil price volatility. If the war with Iran ends soon, oil prices will likely decline, putting downward pressure on Chevron's stock price.

A great company, but not a great investment right now

Chevron's latest results demonstrate its tremendous cash-generating power and financial strength. However, elevated oil prices and refining margins contributed significantly to the earnings surge, making the quarter an unreliable baseline for future profits. Chevron remains an excellent long-term dividend stock, but after its recent rally, I'd prefer to wait for a more attractive valuation before buying shares.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.