Exxon Mobil Is a Buy

Exxon Mobil (XOM) has grown earnings at an annualized rate of 12.75% since 1999; growth has been volatile with the economic cycle. Estimated Cash Flow (EPS+DEP-CAPEX) had grown at an astounding 28% annualized between 1999 and 2008. Dividends have grown at 7% annualized over the same period. The stock is yielding over 2.4% at present; this compares with median dividend yields of 2.61% over the past decade. The expected 2009 payout ratio is 42% - not low, but over the 31.88% median levels seen over the last decade. Nonetheless it is not unreasonably high so the dividend is safe. The company returns value through a mix of dividends and buybacks. The buyback program is not smart – 2006 to 2008 were periods during which buybacks were in operation; years during which the annual average price was at high valuations. Low buybacks have occurred while the stock traded at low levels early in the decade.

The balance sheet is very strong and unleveraged – this provides adequate funding for acquisitions and organic growth. XOM is a very smart buyer with immense skill in buying interests when valuations are sensible.

In my view there is potential appreciation to $140 to $180 by 2014. This translates to an annual return potential of over 15% excluding dividends with upside potential to a 20% annual return excluding dividend. Materials and Industrials have been outperforming in recent months; it is now time for energy to outperform in its place in the economic cycle. The current price level ($70), is an excellent entry level for traders, cycle investors, and for buy and hold investors. At this level, XOM trades at a 30% discount to my estimate of the Graham Intrinsic Value and at a nominal discount to my estimate of fair value. The strength of the balance sheet adds significant defensive characteristics to what is primarily a cyclical stock and thus downside risks are in my view limited.

Please refer to XOM on the Quant Report for insight into numbers referred to above.

Disclosure: No Holdings.

Comments

[desicon:]

The biggest problem for XOM is it is a global piñata with bulls eye for the politicians to take aim at.

Sep 22 11:59 AM

[CAJUNGATOR:]

the worldwide demand for petroleum products will not go down despite all the "green" talk. It is just that-talk. XOM has the wherewithall to go anywhere and do anything it wants and they certainly know how to make money. Long term, XOM, BP, & PBR look good. Cajungator

Sep 22 03:24 PM

[FinanceManiac:]

desicon - you point out a very important fact about XOM...."it is a GLOBAL..." XOM may take the brunt of many political attacks, but at the end of the day if you ask those same politicians to open their wallet, you are likely to find and Exxon Mobile Visa credit-card. Their product is needed by Developed, Developing, and Emerging markets...do you know what that means??? I'll not only tell you, I'll show you:
$$$$$$$$$$$$$$$$$$$$$$

Sure, some law may get passed and put financial constraints on XOM, but they will bounce back, and prove that they are a strong Long-Term investment that offers substantial returns. And as far as going green is concerned...I'm all for helping the environment, but "green" alternatives are not always suitable as supplements to oil.

Sep 22 04:50 PM

[ridgelinerover:]

Seems like XOM has faced those challenges since the days of Rockefeller, and has dealt with the issues effectively over the years (based on the stock appreciation and dividends over a long period of time).


On Sep 22 11:59 AM desicon wrote:

> The biggest problem for XOM is it is a global piñata with bulls eye
> for the politicians to take aim at.

Sep 22 08:28 PM

[BullnBear:]

Great article,

I’m a fan of a great deal of majors including XOM, COP, and CVX.

Sep 23 01:10 AM

[BullnBear:]

I believe that the Health Insurance companies are going to take this over, at least in the U.S.

On Sep 22 11:59 AM desicon wrote:

> The biggest problem for XOM is it is a global piñata with bulls eye
> for the politicians to take aim at.

Sep 23 01:11 AM

[FloridaJo:]

I've owned it since 1978~9 with returns of 15% including the dividend reinvestment. I'm long XOM. Very long.
Right now I believe there will be sideways movement and am playing in and out with a different portion of my portfolio.
XOM is a safe long term investment in my opinion opposite the dollar no matter what the dollar does. If the dollar is strong, XOM will make a lot of strong dollars, if the dollar goes week, the global span will make the stock price higher.

Sep 23 08:49 AM

[Gassy:]

XOM is such a waste of anybody's time especially when (1) Oil production continues to decline rapidly - oil being replaced by Qatari gas (LNG) trying to sell into US and UK. I am better off buying shale gas in US. (2) Cost rise as production declines and the services remain the bottle-neck (3) Capital intensity (capex) continues to rise to reduce production decline and exploit more difficult areas of the world (4) Desperate for reserves as the majors are shut out from all the attractive areas of the world and have to compete with Chinese and Indians for assets.
I agree XOM is probably among the more efficient of the operators but future is much more difficult for CVX and XOM than past. So past 20 years performance is irrelevant. Buy XTO, RRC, SWN, CHK and you have a serious business model of increasing US nat gas reserves, while the prices are at their lowest point.

Sep 23 09:35 AM

[Nyetnichevo:]

I agree with Gassy. XOM will find it difficult to replicate the gains of the last 10 years. They've already captured a huge part of the US national wealth. The pickings will be slimmer going forward. Oil being harder to find and more costly to extract, this will pressure margins. Look for the smaller, nimbler players to excel.

Sep 23 11:03 AM

[Alamo:]

What XOM has done over the past 20-50 years is make a bundle of money and use it to make more. That is historical. Today, they are continuing to champion a resource that is quickly disappearing regardless of what their vast propoganda machine spiel sets forth.

XOM's proven reserves are decreasing at around 5 percent annually over the past 3 years and it is doubtful that that trend will not continue. What does their future hold in 15-20 years? Presently, their "strategic" thinking seems to be chasing around the far corners of the globe looking for increasingly difficult to find reserves and cutting deals with increasingly difficult to "negotiate with" foreign government bureaucrats. Both endeavors---finding reserves and then "enticing concessions from the controlling powers" is very expensive as well as extremely risky.

A far less risky and less expensive course would be to scrap XOM's wild goose approach and concentrate their money and energy toward buying a Chesapeake or XTO or other principle player in the domestic natural gas exploration and production game. At this time when low natural gas prices have depressed market caps throughout the E and P sector, when the US begins driving on CNG the value of those principle-player companies will quickly double at least.

Regardless, XOM's future is bleak if it continues its current direction. Are there any XOM share holders reading SA?

Sep 23 12:17 PM

[metaforge:]

No thanks. I'd much rather buy a nice stable high div paying oil trust that flies under the radar.

Sep 23 02:10 PM

[reluctant:]

Been to XOM a number of times; always good. Going there again. Shan't live long enough to see bad.

Sep 23 02:34 PM

[milo Wolff:]

If you understand the carbon cycle that converts Sun energy to life energy (photosynthesis), you will realize that without CO2 and without carbon-containing energy, the 'environment greenies' may be happier but we all be dead.
C02, and carbon are basic to life; no choice.

Milo

Sep 23 03:11 PM

[andruomail:]

They're not trying to remove carbon from the Earth! that would be crazy...

Sep 23 03:32 PM

[Crude Oil T...:]

This is no time to suggest to retail investors to take long term positions in Exxon. Crude oil should go lower taking Exxon with it, I'll add to my XOM at crude oil $58 level.

Sep 23 04:26 PM

[jarco:]

Many good points here. Seems the bottom line suggests XOM has lost leverage and hence interest over the longer haul.

Sep 23 04:53 PM

[metaforge:]

Crude lower? Wow I dunno how you figure that. In the short term maybe, but not medium or long term.

Sep 23 05:43 PM

[Kilgore:]

I don't know why you would describe the share buyback plan as "not smart". The company has a choice, it can either pay that same money out in dividends (and have shareholders be taxed twice on the same earnings) or it can return the money to shareholders by reducing the number of shares outstanding. For a company like XOM with such great long term assets, reducing the number of shares every year at a rate of 6-8% of total shares outstanding is the most prudent and shareholder friendly thing it can do.

My only fear with XOM is that too many of its best assets are in places like Nigeria, Azerbijan (sp?), ect., where social unrest could very easily lead to a nationalization of assets like is occuring in Venezuela.

Sep 27 07:16 PM

[Shiv Kapoor:]

Buybacks are very good as long as shares are bought back when shares trade at a discount to intrinsic value; even a slight premium to intrinsic is okay because there is better tax efficiency in buybacks.
As it happens, I agree I have been somewhat unfair in saying the buybacks were not smart - I know the share prices were elevated because of the benefit of hindsight, which vision was not available for XOM. In fact shares of XOM were trading at apparently reasonable valuations during 2006/2007/2008 - yet anyone who invests in energy knows it is highly cyclical - buybacks when the market is at and approaching cyclical troughs should be the strategy.
For me buybacks should be either smart (below intrinsic) or consistent (regardless of value sort of like a stable dividend with shares being bought back regardless of price - this gives a $ cost averaging advantage).

On Sep 27 07:16 PM Kilgore wrote:

> I don't know why you would describe the share buyback plan as "not
> smart". The company has a choice, it can either pay that same money
> out in dividends (and have shareholders be taxed twice on the same
> earnings) or it can return the money to shareholders by reducing
> the number of shares outstanding. For a company like XOM with such
> great long term assets, reducing the number of shares every year
> at a rate of 6-8% of total shares outstanding is the most prudent
> and shareholder friendly thing it can do.
>
> My only fear with XOM is that too many of its best assets are in
> places like Nigeria, Azerbijan (sp?), ect., where social unrest could
> very easily lead to a nationalization of assets like is occuring
> in Venezuela.

Oct 02 10:44 AM