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Summary

  • In the latest installment of our Head-To-Head series, we pitch two companies from the energy space, Exxon Mobil and Devon Energy, against one another.
  • The article focuses on the relative strengths and weaknesses of Exxon Mobil and Devon Energy based on business performance and sustainability/dividends.
  • It concludes by discussing the current valuations of the two companies and answers whether Exxon Mobil represents good relative value at current price levels.

Exxon Mobil Background

Exxon Mobil (NYSE:XOM) was founded in 1870 and is headquartered in Irving, Texas. It explores and produces for crude oil and natural gas. As of December 31, 2013, the company had approximately 37,661 gross and 31,823 net operated wells. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene, polypropylene plastics, and specialty products; and transports and sells crude oil, natural gas, and petroleum products. In addition, the company has interests in electric power generation facilities. It operates in the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.

We score each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

  1. Return on equity
  2. Return on assets
  3. Operating margins
  4. Quarterly revenue growth
  5. Quarterly earnings growth

Sustainability/Dividends

  1. Debt to equity ratio
  2. Interest cover
  3. Dividend payout ratio
  4. Forward yield
  5. 5-year average yield

Once we have scores for the two buckets, we can then assess whether a company represents good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.

Valuation

  1. Forward price to earnings ratio
  2. Price to book value ratio
  3. Enterprise value to EBITDA
  4. Price to sales ratio
  5. 5-year price to earnings growth ratio

So, for example, a company that scores well compared to its rival on the first two buckets (business performance and sustainability/dividends) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below highlights the data that we will use to score Exxon Mobil and Devon Energy (NYSE:DVN) for the first two buckets.

Stock

Exxon Mobil

Devon Energy

Business Performance

Return on equity

18.57%

7.37%

Return on assets

7.83%

4.30%

Operating margins

11.05%

26.31%

Quarterly rev. growth

-1.20%

76.60%

Quarterly EPS growth

-4.20%

N/A

Sustainability/Dividends

Debt to equity ratio

11.68%

61.94%

Interest cover

231.71

6.00

Dividend payout ratio

34.00%

22.00%

Forward dividend yield

2.70%

1.20%

5-year average yield

2.40%

1.20%

We then score each company relative to its peer based on the above data, with points being awarded as follows:

1st place: 10 points

2nd place: 0 points

Below are the scores for Exxon Mobil and Devon Energy:

Stock

Exxon Mobil

Devon Energy

Business Performance

Return on equity

10

0

Return on assets

10

0

Operating margins

0

10

Quarterly rev. growth

0

10

Quarterly EPS growth

10

0

Sustainability/Dividends

Debt to equity ratio

10

0

Interest cover

10

0

Dividend payout ratio

0

10

Dividend yield

10

0

5-year average yield

10

0

Total Score

70

30

As you can see, Exxon Mobil easily beats Devon Energy in our first two buckets. Indeed, the company appeals to a different set of investors than its smaller, more speculative energy rival. For instance, while Exxon Mobil is a highly sustainable business, as shown by a low debt to equity ratio of just 11.68%, Devon Energy has a far riskier balance sheet, with its debt to equity ratio standing at 61.94%. Of course, the interest cover of Exxon Mobil is extremely high at 231.71, so shareholders in Devon Energy should perhaps not be overly concerned with current levels of headroom. However, a challenging sequence of quarters (as happened in 2013 when the company made a loss, hence the 'N/A' being inserted for quarterly earnings growth) plus rising interest rates could cause the company a headache going forward.

Meanwhile, Exxon Mobil appeals to income-seeking investors through offering a forward yield of 2.7%. Although it just misses out on entry to the '3% club,' a yield of 2.7% is still fairly impressive and, when coupled with a payout ratio of just 34%, shows that dividends per share could move significantly higher. As a less mature company, Devon is likely to focus on internal growth and use excess cash to this end, as opposed to distributing it to shareholders.

Although Exxon Mobil lost out to Devon in terms of operating margins, an operating margin of over 11% remains appealing. This, coupled with a strong showing in return on equity and return on assets ratios, highlights just how profitable Exxon Mobil remains. Certainly, it is unable to match the super-strong growth rates that a riskier, more speculative company such as Devon can offer investors. However, we feel that its potent mix of sustainability, a good yield (with scope to increase at a rapid rate) as well as a high level of profitability mark out Exxon Mobil as a highly attractive energy play for most investors.

Sure, Devon Energy may appeal to more growth-seeking investors, but Exxon Mobil could be classed as a 'core holding', we feel, for the majority of DIY investors.

Valuation

So, we feel that Exxon Mobil has performed very strongly in the first two buckets and, as such, this should be reflected in its valuation versus Devon Energy. Let's see if it is.

Stock

Exxon Mobil

Devon Energy

Valuation

Forward price to earnings ratio

13.40

11.72

Price to book ratio

2.48

1.54

EV/EBITDA

7.46

7.28

PEG

3.50

0.74

Price to sales ratio

1.11

2.55

The valuation metrics above provide a mixed result when it comes to identifying pricing discrepancies. Sure, the PEG ratio highlights what we expected: Devon has a much higher forecast growth rate than its larger peer as a result of being more nimble, although, as the first two buckets showed, the cost of that is higher risk. We do feel, however, that a stable, highly profitable and relatively high-yielding stock such as Exxon Mobil should be trading at a higher premium to a more speculative peer such as Devon Energy. Currently, its P/E ratio is just 14.33% higher, while its EV/EBITDA ratio is only 2.48% higher, which in our view seems rather low, given the added stability that Exxon Mobil provides. As such, we feel that Exxon Mobil has the potential to outperform its energy peer as a result of stronger scores on the first two buckets, as well as a premium that, in our view, is too narrow at current price levels.

Conclusion

Exxon Mobil is a high-quality company that we believe offers good value at current levels. It scored highly on the Team Money Research rating system, beating its energy peer, Devon Energy, by 70 points to 30. It also appears to be relatively undervalued at current levels, since it trades on what we believe is too narrow a premium compared to Devon Energy. As such, we feel it could outperform its more speculative energy peer going forward.

Feedback Request: What do you think about Exxon Mobil? Would you buy, sell or hold right now? Please comment below!

Source: Exxon Mobil Goes Head-To-Head With This Energy Play