I submit there's a specific time for patient buyers to purchase shares of ExxonMobil (XOM) stock. Historically, it has proven to offer a trader a short-term bounce, or an investor a reasonable entry point. The technique has worked for many years; in both up and down markets.
It's related to the fundamentals, but a bit of a quiet quirk of the numbers versus part of an exhaustive analysis: A good time to buy XOM stock is when the trailing twelve month (TTM) price / earnings ratio falls below 9x.
In this article, I will outline ExxonMobil Corporation. First, I'll offer a brief synopsis of the business; then provide several basic fundamentals; and finally, I will demonstrate that "buy below a 9x P/E," has been a bellwether marker in the past.
The company's principal business is energy. ExxonMobil Corp is involved in exploration for, and the production of, crude oil and natural gas. ExxonMobil manufactures a spectrum of petroleum products. It is engaged in the transportation, distribution and sale of crude oil, natural gas, distillates and various petroleum products.
The company is the #1 natural gas producer in the United States. It is also the largest U.S. corporation measured by market capitalization.
Is Exxon a Sound, Fundamental Investment?
Regardless of the historical merit of buying ExxonMobil stock based upon the TTM P/E ratio, an investor should foremost understand and be willing to own the stock based upon overall business and financial fundamentals. I recommend that even traders have a basic knowledge of the company beneath the security.
Exxon passes such a test of its fundamentals with reasonable acumen. One may argue it is not the best large cap stock to own, but there are few compelling reasons to avoid the stock due to outsized risks or the likelihood of long-term, substandard forward investment returns.
The company owns a fortress balance sheet. Exxon carries almost no debt. Total Debt-to-Equity is but seven percent. This is excellent versus peers or on an absolute basis. The Current Ratio is 1.0; likewise a sound figure. At the end of 2012, the company carried nearly $10 billion in cash and short term investments on the books. This figure has been roughly maintained for several years running.
Returns are the best in the industry. Here's a table comparing XOM fundamental return figures versus industry peers. Please make note that of the Super Majors [Exxon, Shell (RDS.A), BP (BP), Total (TOT) and Chevron (CVX)], ExxonMobil is the king of return on capital, shareholder equity and assets. Management prides itself on maintaining leadership in these key areas.
courtesy of fidelity.com
Exxon also sports strong and consistent margins. Here's another table listing company margins and peer comparison. Behind the figures, I determined that of the Super Majors, Chevron trumps ExxonMobil in the gross, operating and net margin categories. However, XOM senior management retains the second-place position amongst the other Super Major competitors for all of these metrics.
courtesy of fidelity.com
Annual cash flows are enormous. Given the staggering amount of capital the company spends each year, I like to measure Free-Cash-Flow (operating cash less capital) as the primary metric for understanding how much money Exxon is netting out for its shareholders. Here's a three-year table summary:
ExxonMobil Free-Cash-Flow / Share 2010-12
FCF per share
Furthermore, XOM directors have increased the cash dividend for some 30 years running. Some investors complain that the cash dividend yield is sub-par versus competitors. ExxonMobil management compliments the dividend with an aggressive stock re-purchase plan. I will not debate here the value or philosophy of this approach. I will simply state that by any measure, the dividend appears safe. I believe the company management and directors will continue to pay dividends and buyback shares in a like manner for the foreseeable future.
Over the past five years, only Chevron has outpaced ExxonMobil's shareholder returns. Here's a chart comparing stock prices for the five Super Majors.
courtesy of google.com/finance
Not bad. I believe a good case can be made that no one disgraces themselves by owning XOM stock.
Let's Get Back to the P/E Ratio Assertion
OK, so let's assume that Exxon offers sound fundamentals. It's a decent stock to own.
What about the ttm 9x P/E entry point?
I'm going to attempt to back into my thesis via two charts. First, here is clip from the S&P IQ analysis for XOM stock. Please note the lowest annual P / E ratios over the past ten years.
courtesy of tdameritrade.com / Standard & Poor's
Now, you see that in most years, the multiple bottoms no lower than 9x. However, more recently, it has seen dips to as low as 7x (during the depths of 2008/09 crash) and more recently has experienced lows of 8x (in 2011 and 2012).
Let's explore these more recent occurrences with the following chart. It is a monthly price and P / E multiple analysis for the period 2008 to date.
I've yellow-highlighted the lowest monthly multiple experienced by XOM stock over the past ten years: April 2009 and an approximate 7.7x ratio. This interactive chart offers that in the following month of May, the P / E rebounded to 9.2x. Furthermore, in 2011 and 2012, the monthly P / E never fell below 9x. Any decline below that mark was on an intra-monthly basis only.
courtesy of fidelity.com
To circle back around, if we have established that ExxonMobil stock Price / Earnings only falls below 9x on a short-term, or intra-monthly basis, we now need to determine if the earnings have fallen after hitting such lows. If so, then even if the multiple rebounded, the price of the stock may still have fallen since Price = Earnings x Multiple.
Indeed, the answer is no.
Please look back at the S&P 500 IQ chart. Earnings have risen each year since 2010. Therefore, if the P / E multiple has been 9x, and one purchased the stock, even if the multiple fells back to that level later, the price would have to have been greater than when the investor bought the shares. Dividend income is gravy.
The Bottom Line
I classify myself as a fundamental investor seeking undervalued securities. While I favor income-producing equities, I scout for either growth or value stocks at a perceived discount; then I hold them until they reach "fair value."
This post is a bit out of character for me, since it emphasize a short-term quirk in one metric for a given stock; in this case ExxonMobil.
Nonetheless, assuming one premises that XOM is a basically sound investment, my thesis appears to suggest a particular entry point that points towards future capital gains (at least for the short-term). I have utilized this approach successfully, with ExxonMobil stock, several times in the past.
Indeed, once long XOM stock, the investor must then determine his / her exit point. I encourage each person to have a target, or "get out" price determined at the time of purchase, whether the stock is to be retained as a long-term investment or simply a short-term trade. While this was not the purpose of this article, those who follow my regular contributions to Seeking Alpha will generally find such analysis within the text of most submissions.
Of course, please do your own analysis prior to purchasing any investment. Readers may note that despite the previous success one may have had buying Exxon stock when the P / E is down, "Past performance is no guarantee of future results."
The heart of good stock investing is all about probabilities and reversion to the mean, not guarantees.
Good luck with all your 2013 investments.