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Ray Merola

Ray Merola

I recently retired from Shell Oil after serving over thirty years in the energy industry.  My career was concentrated in the downstream business; serving various…

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Stalwart ExxonMobil Investment Lagging for Now: Patient Investors Need Not Despa

Despite a double-digit run up in the S&P 500 this year, ExxonMobil stock (XOM), has lagged the averages badly.  The shares have barely returned three percent in 2013, including the dividend.

ExxonMobil (XOM) – YTD price and volume
ExxonMobil YTD Price and Volume
Courtesy of bigcharts.com

ExxonMobil Corp is a worldwide, integrated energy concern.  It is the largest company as measured by market capitalization; clocking in at nearly $400 billion.

Do the fundamentals indicate a broken stock or a broken company? 

In this article, we will take a brief look at XOM fundamentals and share price valuation.


When evaluating a stock, I begin with a straightforward methodology: review key financial metrics.

Balance Sheet

ExxonMobil has a fortress balance sheet.  The company carries almost no debt.  Key balance sheet measures include Total Debt-to-Equity and Equity-to-Assets.  XOM demonstrates strong figures in these areas on an absolute or relative basis. 

Debt-to-Equity is only seven percent, indicating a combination of very low liabilities and high Owners' Equity. 

The E/A ratio stands at 50 percent.  Benjamin Graham, the godfather of value investing, used the a 50% or greater benchmark as a threshold figure to identify companies with underlying balance sheet strength.  Exxon meets the mark.

In addition, the Current Ratio (Current Assets / Current Liabilities) is 1.0; likewise a sound figure suggesting good liquidity.  Indeed, at year-end 2012, the company carried nearly $10 billion in cash and short term investments.  This figure has been maintained for several years.  The cash level equates to about $2.12 a share.

Return on Equity, Assets and Investment

ExxonMobil offers investors returns that are amongst the best in the industry.  Please find below a table comparing XOM return figures versus its industry peers.  Comparing the five Super Majors [Exxon, Shell (RDS.A), BP (BP), Total (TOT) and Chevron (CVX)], ExxonMobil stands at the top when measuring return on shareholder equity, return on assets and return on investment. 
Management prides itself on maintaining leadership in these key areas.

Return on Equity, Assets, and INvestment
Courtesy of fidelity.com

Related article: Snap up Energy Company Stocks whilst Resource Stocks are at an All-Time Low

Margin Comparison

Exxon has long maintained consistent margins.  Please find below another table listing company margins and its percentile standing versus oil and gas industry peers.  For the Super Majors, only Chevron's gross, operating and net margin categories exceeded those of ExxonMobil over the past twelve months.  XOM placed second of the five largest competitors in these three key metrics.

Profit Margins
Courtesy of fidelity.com

Cash Flows

ExxonMobil Corp throws off enormous amounts of annual cash.  However, given the huge capital the company spends each year to maintain its reserve base, I prefer to measure Free-Cash-Flow (operating cash less capital) as the primary metric for evaluating how much money Exxon is generating for its shareholders.  FCF is sometimes referred to as Owners' Earnings.  Here's a three-year table summary:


Return of Capital

The ExxonMobil board of directors has increased the cash dividend for 30 consecutive years.  Investors fret that despite this record and a five-year dividend growth rate of 10 percent, the cash dividend yield is sub-par versus the other Super Majors.  ExxonMobil management responds with the fact that the dividend is backed with an aggressive stock re-purchase plan. 

To support the assertion, company leadership has reduced the total number of shares outstanding by ten percent over the past three years.  

Total Shareholder Returns

Since 2008, only Chevron Corp has outpaced ExxonMobil's stock price appreciation.  Here's a chart comparing stock prices for the five Super Majors.

Stock Price Evaluation of Five Majors
Courtesy of google.com/finance. Click to enlarge.


When it comes to historical valuation, a picture tells a thousand words.  Let's look at ExxonMobil's valuation using F.A.S.T. Graphs; this tool can graphically depict the relative valuation of XOM stock.
First, here's a ten-year chart showing the correlation between Exxon's price and operating earnings:

Earnings and Price Correlated FAST Graph
Courtesy of fastgraphs.com. Click to enlarge.

As we can see, the price (black line) has effectively tracked the blue line (normalized P / E ratio) over this ten-year period.  While there have been times where the price moved above or below the blue line, it has tended to return to the normalized price / earnings line over and over again. 

Related article: China still Hopes its Renminbi will become the Favoured Global Currency

Premising similar action in the future, one may offer that the current stock price is slightly undervalued.  If the stock price rose to meet the last marker on the blue line (2013 projected EPS of $7.90), it would indicate a $94 price target.  The stock price closed at $89 on Friday.  This suggests an upside of five or six percent, plus dividends.  It should be noted that ExxonMobil management rarely misses earnings forecasts, thereby adding confidence in the likelihood of meeting the 2013 forecast.  Unless an investor premises a significant change in the go-forward market multiple, or a serious miss for 2013 earnings, he / she may surmise that a modest uplift in the share price is reasonable. 
Let's look at the valuation in a slightly different way.

Utilizing a similar chart style, let's check XOM's valuation comparing price versus FFO (Funds from Operations) instead of operating earnings.  This permits us to double-check both historical context and valuation methodology.  Note the FFO “dot” is filled under “valuation type” in this case:

Earnings and Price Correlated FAST Graph 1
Courtesy of fastgraphs.com. Click to enlarge.

This F.A.S.T. Graph reinforces the previous one.  Here, the “blue line” normalized Price / FFO multiple has averaged about 8.6x.  The price has likewise tended to track this multiple over the past decade.  Using the Street's 2013 projected FFO, and doing the math, ExxonMobil stock price is forecast to trade about $100 a share during the next twelve months or so. 

It appears the stock is somewhat undervalued by either measure.

The Bottom Line

ExxonMobil stock has demonstrated fundamental valuation metrics to indicate it is a well-managed, well-capitalized going concern.  XOM generates a lot of cash, management invests heavily for the future, and yet returns considerable capital for its shareholders.  The company stacks up favorably against industry peers, including its closest cousins, the Super Majors. 

The subsequent valuation exercise offers a snapshot that shows the company stock is undervalued by less than ten percent or so.  A safe and growing dividend adds additional cash returns to the investor.
Unfortunately, XOM stock is trapped in a poorly-performing market sector now: Energy. 

Of the ten Standard & Poor's market sectors, Energy tracks eight of ten.  Indeed, the three-month trailing returns for this sector have been a little over two percent.  Meanwhile, the overall market as measured by the S&P 500 index has surged almost eight percent over the same span.

In addition, earnings for the company as well as the sector are projected to be flat or modestly declining this year. 

Finally, Exxon is in the midst of a heavy-capital spending program to align new oil and gas production against depleting reserves.  The company plans to invest over $38 billion just this year.  While it is encouraging to note that management is aggressively intending to replace reserves, and that ExxonMobil is one of the most efficient upstream operators in the business, the investor should consider that the “capex-to-cash register” path is measured in years, not months.  The process will take time.        

Therefore, ExxonMobil stock seems to offer longer-term investors a sound, but not immediate, return.  Make no mistake: the company has the wherewithal to weather economic storms, and the operational / financial acumen to create shareholder value.

However, XOM is currently situated in a lagging market sector that is projected to grow slowly over the near-term.  This is why the stock price has lagged while the U.S. Market has been hitting new highs.  Investor sentiment has been neutral to outright bearish. 

For those who want exposure to the Energy business, one cannot go wrong investing with ExxonMobil.  However, the stock may not provide immediate gratification.  True, it's likely the dividend will be increased again soon, and corporate management rarely misses earnings projections.  Nonetheless, prudent investors may consider building a position around this equity now, then adding slowly to it upon short-term price weakness while the sector strengthens and returns to favor.

Please do you own homework before making any investment, and seek professional advice as necessary.  Good luck with all your 2013 investments.

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