On my quest finding great companies that are selling at discounts, I already came up with a couple of blue-chip mining and agricultural firms (see my related articles) that play crucial and dominating roles in supplying construction industries worldwide with their required inputs. A couple of high-profile companies among them were Rio Tinto (RIO), BHP Billiton (BHP), Potash (POT), VALE (VALE) and ConocoPhillips (COP), which are currently selling at deep discounts to their intrinsic values with P/E ratios of only five and dividend yields around 3%. Very high earnings yields, as in our case, are an indicator of at least temporary undervaluation. I personally believe, and have structured my portfolio and those of my clients accordingly, that we already have entered a decade that should prove very lucrative for equity investors.
Worldwide markets still are under the impression of too much debt (sovereign and corporate) and growth uncertainty, which will subside eventually. In my opinion, buying well-known, well-capitalized, market leading companies in this market environment should prove a lucrative investment over time. In that regard, Exxon Mobil Corporation (XOM) is another high-quality company with solid historical performance, strong asset base and market position as well as cash flow strength to back up its dividend.
XOM is a U.S. listed and domiciled oil and gas company with a market capitalization of $384 billion making it one of the largest companies in the world. As most of its competitors, such as BP (BP), ConocoPhillips or Chevron (CVX), it is a vertically integrated oil company that not only engages in sourcing and exploration of oil and gas, but also extends its range of expertise to other steps in the value chain: production, manufacturing and transportation of crude oil, natural gas and other related products.
With almost $500 billion in sales and $40 billion in income the company is a true behemoth. And, with a profit margin of 9% and a return on equity of 26% XOM is not only a big but also a highly profitable company.
The company trades at $82, which is at the higher bound of its 52-week trading range, which indicates that market perception toward XOM is more positive compared with its peers. Considering investors are buying a Fortune Global 500 company with internationally located strategic assets in the prime commodity needed for growth, strong financials and historically high profitability, a P/E ratio based on 2013 earnings of 9.3x makes XOM even more of a bargain for risk-conscious investors. On the way, investors can pick up a 2.8% dividend yield.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XOM over the next 72 hours.