Exxon Mobile: Do Record-Breaking Earnings Guarantee Higher Stock Prices?

Exxon Mobil (XOM) announced record quarterly earnings once again this past Thursday (see conference call transcript). In fact, XOM has announced record earnings virtually every quarter for more than two years now.

Nobody is really surprised that the descendant of John D. Rockefeller's Standard Oil is raking in the cash with oil prices at all-time highs last quarter. The real question everyone has is, "Will these record earnings boost the value of XOM stock?"

Earnings are perhaps the most-watched piece of fundamental data investors look at when they conduct a fundamental analysis. After all, it is earnings that drive dividends, growth and higher stock prices...or do they?

Let's take a look at the Exxon Mobil (XOM) chart below and see how XOM's stock price has fared after its last few record-breaking earnings announcements.

So how did Exxon Mobil's last four earnings announcements affect XOM's stock price?

November 1, 2007

• The stock dropped the day the earnings announcement was released, and it continued to drop for two weeks afterward before rebounding.

February 1, 2008

• The stock once again dropped the day the earnings announcement was released, and it continued to drop for approximately one week afterward before rebounding.

May 1, 2008

• The stock dropped the day the earnings announcement was released, and continued to drop for approximately one week afterward before rebounding.

July 31, 2008

• We will have to wait and see, but at the time of this writing, the stock price is already moving lower.

So what is going on here? Why didn't the stock price rise to new highs on each of these record-breaking earnings announcements?

It's all about expectations---expectations of what the total earnings was going to be and expectations of what earnings are going to be in the future. As crazy as it may sound, if a company has a record-breaking quarter but Wall Street expected it to break the record by an even larger margin, the price of the stock will fall because the company didn't meet Wall Street's expectations. Also, if a company has a record-breaking quarter but Wall Street anticipates it won't fare as well in subsequent quarters---either due to guidance the company gives that it won't be performing as well or due to something Wall Street analysts see---the price of the stock will fall.

Disclosure: none

Comments

[stupid_inve...:]

First the author needs to learn to spell.

2008 Aug 03 08:03 AM

[captmike:]

Exxon's new art project to pacify the democrats; a mobile.

2008 Aug 03 08:42 AM

[john s. gordon:]

timing of results releases & naked shorts by the hedge funds & speculators.
> jack

2008 Aug 03 09:02 AM

[barcswine:]

Who ever said that Mr. Market was rational? XOM was a BUY yesterday; a BUY today; and will continue to be a BUY into the foreseeable future for conservative investors.

I am LONG on XOM, always have been, and will continue to be until such time as my XOM holdings pass to my grandchildren. Hopefully, they will NOT sell it, but just enjoy the investment ride as I have done for so many years now.

2008 Aug 03 10:11 AM

[NOWHEREMAN:]

You are right, it is about expectations. You are also wrong in attributing those expectations to XOM. The expectation is that oil will drop to reflect the recession in the developed nations. That correction may have already been fulfilled, I doubt XOM has been targeted specifically.

A 5 year chart reveals that XOM has done this before. It went through a sideways motion about 3-4 years ago before moving up to its present sideways motion.
My expectation is that the next leg up is close.

The whole energy complex is deeply undervalued. What would start it moving up again without a Iran/Israeli war? Value players.

The Financial Institutions unloaded the most liquid stocks in their quest for Capital. It is time for other sectors to take similar hits.

2008 Aug 03 12:26 PM

[CrossProfit:]

Commentator paultaut has correctly hit the nail on the head.

Large institutional holders have been unloading 'energy' stocks into strength that occurs after earnings. Had the institutional investors attempted to unload all at once or on 'no news', the share price would have dropped a lot more.

Unless there is still another round of raising cash, 'energy stocks' will start to rebound reflecting the price of oil. Using the old adage of a 1 to 1 ratio for XOM (meaning if oil is at 60, XOM trades at 60 and if oil is at 120 XOM trades at 120), then XOM is either severely undervalued or the market expects oil to drop - near term - to 85.

The 1 to 1 ratio is usable only when crude prices are stable. When crude is on its way up, a 1.15/20 to 1 ratio is appropriate. When declining, a 0.80/0.85 to 1 ratio is used. This means that at current XOM market price (assuming the market expects crude price decline) oil should drop to the 100 mark.

We don't think this is the case as the market should have sent the pure play refiners up (in the opposite direction). Based on the price action, the market is expecting oil to hover around current prices for a while longer with a bias towards a slow and gradual decline with a possibility of reversing overnight (risk factor). This brings us back to the 'heavyweights' raising cash theory, actually documented in May.

The above is not to be taken as a full analysis, obviously it is far more intricate...such as differentiating between U.S. players and global players, differences between crack spread variables by refiner and crude types, source location, foreign levies and taxes (anticipated increases) and upstream/downstream margins and operations.

There are four 'energy' stocks in focus on the CrossProfit homepage:
www.crossprofit.com

Caution: Not all 'energy' stocks are equal. Natural gas (NG) is NOT oil and pure play NG companies may not respond accordingly. Solar energy companies are classified as electronics (not energy) on the CrossProfit site (Hemscott).

2008 Aug 03 04:10 PM

[eh?:]

um, isn't this because oil stocks are valued by the market more on the basis of booked barrels, and XOM announced it was producing more than its had in reserve and that the outlook in terms of adding reserves was down each of the quarters mentioned.

afterwards, the price of oil went up, so even though XOM had fewer barrels in reserve, its value went up with it. this should have a doubling effect should the price of oil go down considerably.

2008 Aug 03 07:53 PM

[eh?:]

er, that is, XOM announced it was producing more oil than it was adding to its reserves and its outlook for adding seemed, to the market, grim.

2008 Aug 03 07:59 PM

[NOWHEREMAN:]

XOM is producing more or the same amount of oil. Unfortunately, it and all the operators who have International operations have contractual agreements as to how much they can extract monetarily before the country of origin receives a greater percentage of production. Because Oil Prices have risen and remained much higher than those Original Contracts envisioned, Oil being received will continue to decrease.

XOM started to try to talk oil prices down for years based on this knowledge( at least, its former head did ). You can expect more announcements of this nature.

They are starting to pay their "dues", years earlier than originally envisioned.

2008 Aug 04 12:18 AM

[rbarksdale:]

No one has brought out the position that the record breaking incomes have caught the attention of washington who see an opportunity to tax these companies to bring down earnings. The market believes that under Abama, tax revenues will bring it to its knees. New well sites are ten years out, world demand will not increase as China uses its alternating day program, and hybrids grow in popularity. XOM will bank the money now to invest in new developments. Not a bright future for the next two years.

2008 Aug 04 11:53 PM