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Exxon (XOM) came into my idea pipeline through a review of Morningstar’s 5-star, wide moat stocks. It currently trades at $61. Please refer to the Quick review explained post if you have questions on what I look for in this analysis.

1- Business Performance Risk (=/-) and intrinsic returns (+)

Metric

Status

FCF / Sales

Last twelve months: 4.5%, below historical performance between 6% and 9%, but above last year’s poor performance of 2%

ROE

LTM: 20%, at the low end of historical performance averaging ~39%

ROA

LTM: 10%, lower than the average of the last 5 years (16%), but in line with industry overall

Revenue Growth

Growth seems to be volatile. On a 10 year basis it was ~7% in 2009, down from previous averages of >10%. The company’s year over year growth itself is quite volatile with years at 20%+ and others negative. 2009 was down 35% year over year.

Cash distribution to shareholders

XOM’s current dividend yield is 2.8% (in line with that of the S&P). The payout appears very volatile given XOM’s earnings volatility but is about 25% over the last 3-4 years.

Over the last 5 years, the company has repurchased about 24% of its own stock.

XOM’s business is – by nature – volatile and while it has had a good run over the last 10 years, the recent lower results are a reflection of the potential downside in such cyclical companies/industries. If I were to invest I would be looking for a high margin of safety to counterbalance the cyclicality risk.

2- Balance Sheet Risk (+)

Metric

Status

LT Debt / Equity

0.1x

Current Ratio

1.1x below the company’s long term average of 1.4x – 1.5x

XOM carries virtually no debt and has a low current ratio which could call liquidity into question. However the company is so large and has so much cash on hand ($13B) that I doubt liquidity is really a risk here.

3- Valuation Risk (=)

Metric

Status

Cash Return

5.0%

P/E

11.7x, below the industry (12.8x), the S&P (13.7x) but in line with XOM”s average over the last 5 years of 12.1x

While XOM appears conservatively valued from a P/E perspective, its cash valuation is high with only 5% cash returns…which is too low to provide a sufficient margin of safety for an investor.

Conclusion

XOM is in a cyclical business in which I would only invest with a large margin of safety – however the current valuation does not seem to offer such a margin. I will not perform a company analysis and will pass on the stock.

Disclosure: No position

Source: Exxon Mobil's Quick Review: Too Cyclical for My Taste