I recently investigated some of the biggest oil companies (by sales) to see if there still is an opportunity to identify an investment that might offer a suitable margin of safety for a value investor. Another criteria for my investigation is a solid dividend yield. My analysis is based on the financial statements of the company for the last 5 years. The focus is on identifying a trend.
Background information on Exxon Mobil (XOM) can be found on the company website. Since mid 2010 Exxon market price has increased from its low of about $57 to the current price of about $91 per share, as is shown in the graph below. That is an increase of 60% in market price in 2 ½ years time. Also it is interesting to see that it is back around its pre-crisis high.
Looking at the income statements from the last 5 years, as shown in the tables below, we can conclude that as of 2009 the company's sales revenue is growing steady on a year to year basis. It has however not exceeded its pre-crisis sales revenue of $477 Billion. The last couple of quarters we see sales declining, which is a worry. If we expect the quarterly trend to continue, 2012 sales revenue will end up below that of 2011. According to the analyst consensus it will end up around $460 Billion, or a decrease of more than 5%.
For the net income and the EPS (Earnings Per Share) it is a different story. The figures indicate that Exxon has been very good at managing its operational cost in this period, especially indicated by the declining "Selling/General/Admin. Expenses" item on the income statement. If net income is about similar to that of Q3 there will be an increase of more than 8% in income and more than 14% for EPS in 2012. Very impressive considering the declining sales.
Note: All values in the tables are in Millions of USD (except for per share items)
Exxon has a solid balance sheet, as is shown in the table below. As for the last reported quarter it has about $13 Billion in cash and cash equivalents, or about $2.86 per share, on its books. Equity is growing at a steady pace for the last couple of years, on average about 5.2% per year since 2008. This is solid but it is less impressive than the 10% of its rival Chevron (CVX) for instance, also see "Chevron: What The Numbers Say". The shares issued have been decreasing nicely since 2008. There are now 416 Million, or about 8%, less shares outstanding than in 2008. Also there are no intangible assets on the books. Very positive signs for a value investor.
Note: All values in the table are in Millions
Operating cash indicates if the company is able to generate its own cash, instead of funds coming from outside financing activities. As shown in the tables below operating cash is growing year on year as of 2009. Here we find the strong point of Exxon: the ability to generate huge amounts of cash. If you compare it to its main rival Royal Dutch Shell (RDS.A), which has similar quarterly sales, it's generating significantly more cash from its operations.
With operating cash the company is able to fund its investing and financing requirements. As we look at the increase/decrease in net cash in the tables, we see that Exxon has significantly been using up its cash reserves in the last quarters. One of the main reasons is that it has been buying back its own stock, already about 15.6 Billion worth in 2012. In a cash flow statement this is indicated with the "Issuance (Retirement) of Stock, Net" item.
Note: All values in tables are in Millions of USD
Currently Exxon is paying a dividend of about 2.5% per year. It is therefore not one of the biggest dividend payers between the oil giants. For instance Royal Dutch Shell pays about 4.8% per year, also see "Royal Dutch Shell: What The Numbers Say". As can be seen in the table below, Exxon is steadily increasing its dividend year on year. On average an impressive 9.8% per year, with an increase of more than 17% for 2012.
The price ratio I prefer is book value. With net book value we don't include the intangible assets in the calculation. Because there are no intangibles on the books there is no difference in this case. Based on the current share price we get a net Price to Book (P/B) of 2.5. This is above the industry average of 1.5 and significantly above its main rival Royal Dutch Shell, which has a net P/B of about 1.24. What is also interesting is the trend in book value. Here we see that it has been growing about 7.4% year on year since 2008. This is very impressive, considering that the stock currently is trading around the same market price level as 2008.
The Price to Earnings (P/E) ratio is a "multiple" of year earnings, so for a P/E of 10 an investor is willing to pay $10 per $1 of earnings. P/E is calculated by dividing the share price by the EPS (earnings per share) for a particular year. Therefore the quarters, as shown in the table, should be viewed as an indication for 2012. For the last couple of years the P/E has reduced significantly. The average P/E for 2012 is around 9.5, with a forecasted 10.2 for full year 2012. It's fairly similar compared to the analyzed rivals (RDS.A, CVX, BP and E).
To look at the financial efficiency of the company we will look at the ratios as shown in the table below. If possible these will be compared to industry average:
P/E = 10.3
Profit Margin = 8.1%
ROE = 19.0%
Profit margin is an indicator of a company's pricing strategies and how well it controls costs. The average profit margin for the Oil & Gas Integrated industry is 8.1%. As can be seen in the table this has become a strong point for Exxon. There is a definite improvement over the last couple of years, it currently is around the industry average.
Return on Equity (ROE) is calculated by dividing net income by equity for a full year. Therefore the quarters, as shown in the table, should be viewed as an indication for 2012. Looking at the trend allows an investor to determine the change in profitability over a given period. As shown in the table, after a dip in 2009 we can see that Exxon has increased its ROE. This well exceeding the industry average of 19% in the last couple of years. I consider companies with a ROE above 20% to be excellent.
Working capital ratio measures both a company's efficiency and its short-term financial health. When it is above 1 it's an indication that the company is able to pay off its short-term debt, as is the case with Exxon. However in a couple of the years was slightly below 1. If this was to worsen then it is an indication that the company cannot pay its debt, with a possible worst-case scenario of bankruptcy. With Exxon however this figure is showing its extreme efficiency in managing its money tied up in inventory and with creditors.
The final indicator used is operational cash flow/sales ratio. Here we want to see the company's ability to turn sales into cash. The higher the number the better. We see that this ratio is growing the last couple of years, which is a very good sign. All in all a well managed company with very good efficiency ratios.
Exxon's current market price is about similar to that of 2008. It has however added to its underlying value, as was shown with the growth of its net book value. What is most impressive about Exxon is its ability to grow its EPS this year with declining sales. Very well managed operational expenses.
The company also has a significant amount of cash and cash equivalents on its books. It is able to fund its investing and financing requirements with its operating cash. The last couple of quarters it has been using the cash to buy back outstanding shares, about 15.6 Billion in total for the first 9 months of 2012.
Looking at the efficiency ratios we have to conclude that this is a very well managed business. All the analyzed ratios are better than or equal to the industry averages. For instance its ROE is growing year by year and is currently well above the 19% industry average. The amount of sales Exxon is able to turn into cash, has also improved. Very impressive for one of the biggest companies in the world.
However, considering the above industry average net P/B of 2.5 together with an annual dividend of about 2.5% it does not look as attractive as some of its rivals. On both these items Exxon is playing catch up to Royal Dutch Shell, also see "Royal Dutch Shell: What The Numbers Say". Exxon is growing its dividend aggressively and reducing the P/B by buying back shares, but this is a very costly endeavor.
Considering the complete analysis I believe that this stock could create an opportunity for a value investor, but based on its P/B with less margin of safety than some of its analyzed rivals.