Have Exxon Mobil's Shares Peaked?

| About: Exxon Mobil (XOM)

Writing about Exxon Mobil (NYSE:XOM) poses a challenge to the writer. The company is so widely followed that it is difficult, if not impossible, to offer a new and different insight that would satisfy readers. With this understanding, I will take the chance and offer an opinion.

Exxon Mobil is the very definition of the huge company. Revenues in 2011 were $486,429 million and net income was $45,090 million. Exxon Mobil manufacturers and markets just about every raw material that can be derived from petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and a range of specialty products. Its operations are global in scope. Exxon Mobil is a fully integrated energy company with operations involving exploration and production of crude oil and natural gas.

In the United States, Exxon Mobil controls about 15.6 million acres, including1.9 million offshore. The company is active in all 48 lower states. Exxon Mobil is also active in Alaska. It is probably no exaggeration to say that Exxon Mobil is active in every corner of the world, save Antarctica.

Exxon Mobil has been out ahead of trends to shift more production toward natural gas from oil, even though natural gas prices are extremely low. This shift is having a negative impact on earnings and will continue to do so for the next several years. Eventually, natural gas prices will rise.

Global demand for energy will continue to expand in response to economic expansion around the globe and continued population growth in the developing economies. Mature economies such as the U.S. and Europe may see flat or declining energy consumption in line with the slow-growth economies. On the other hand, countries such as China, Brazil, and India, to name just a few, will see continued high demand for energy.

Policies to reduce CO2 will raise the cost of using fossil fuels and low emission fuels will slowly replace high-emission coal in the production of electricity. This is a long-term trend that will take 30-40 years to play out. For now, oil, gas, and coal will account for about 80% of total energy consumption.

The supply of both oil and gas will continue to grow, and technology enables Exxon Mobil to recover these fuels efficiently from non-traditional sources, such as shale formations and tar sands. All long trends point to the continued shift toward lower-carbon fuels, particularly natural gas. Natural gas is clean, reliable and plentiful.

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Exxon Mobil's five-year revenue growth rate is 5.2% and the seven-year rate is 7.2%. Revenues reported for F2011, $486,429 million, were about 26.9% higher than F11. For the 12-month period ended June 2012, sales were $498,355 million, or 13.3% higher than the reported $439,974 million one year ago. Sales growth slowed to 1.5% in Q2 2012 when compared to Q2 2011.

Thomson Reuters Research reports consensus sales estimates for F2012 to be $458,742, or 5.7% less than F2011. The estimates range from $403,646 million to $488,467 million. The analysts predict only a small improvement for F2013. The estimates range from $343,375 million to $543,450 million and average $462,146 million.


EPS (diluted-continuing) in F2011 were $8.52 per share compared to $6.22 in F2010, or 35.4% higher. As of Q2 2012, TTM EPS (diluted-continuing) grew 25.1% to $9.52 per share, from $7.60 per share in the year-earlier period.

For Q2 2012, EPS grew to $3.42 as compared to $2.17 per share, or 57.6%. Analysts tracked by Thomson Reuters see EPS dropping in F2012 to $7.72, within a range of $7.33 to $8.10. They see EPS growing about 6.0% in F2013 to $8.18. The range of estimates for F2013 is very broad -- $5.69 to $9.95.

Exxon Mobil's five-year EPS growth rate is about 4.9%. The estimates are more or less in line with the average and reflect Exxon Mobil's exposure to natural gas prices.


Exxon Mobil's gross margin as of Q2 2012 was down to 30.5%, well below its five-year average gross margin of 39.7% and below the industry gross margin of 36.9%. The company reported operating margin of 16.0%, which is more than twice that of the industry median of 7.6% and 90 basis points above the five-year average of 15.1%. The net margin is 9.0%, whereas the five-year average net margin is 8.4% and the industry median is only 5.8%.

Balance Sheet

Exxon Mobil has a rock solid balance sheet. In Q2 2012, it reported $17,802 million in cash and short-term investments and $8,837 million in long-term debt. Long-term debt to total capital is a paltry 5.2% and long-term debt to equity is 5.5%. Long-term debt to free cash is just 38.93%of free cash.


Exxon Mobil is very profitable when measured by return on equity. ROE is 28.6% and is comparable to the company's five-year average of 28.3%. The industry median ROE is 12.3%.

Return on invested capital (ROIC) takes debt into consideration and provides a more holistic sense of profitability. On a TTM basis, ROIC is 46.26% whereas the industry median is just 16.66%. In F2011, ROIC was 24.6%. The five-year average ROIC is 26.1%. Cash return on invested capital can validate earnings-based returns. I estimate CFROI as of Q2 2012 as 13.28%.

Capital Allocation

Exxon Mobil returns excess free cash to shareholders in two ways. The company consistently pays a dividend and it buys back shares. The current indicated dividend is $2.28 per share. At the current share price, the dividend yield is 2.5%. The five-year dividend growth rate is 7.6%; the seven-year growth rate is 8.6%.

The dividend payout ratio is 20.8%, which suggests room for growth. Dividends represent 46.55% of free cash. Exxon Mobil is also buying back shares. The company reduced the average number of shares outstanding by 5.1% when comparing Q2 2012 with Q2 2011. Taken together, the shareholder return was about 7.6%.


Using my estimate of enterprise value to trailing earnings before interest, taxes, depreciation, and amortization, I find that at 4.42 times, Exxon Mobile is selling below its long-term average of 5.5 times but slightly above the industry median of 4.29 times. The EV to free cash ratio is 18.49 times, which is high on an absolute basis. The EV to sales ratio is 0.85 times and a discount to the industry median. The price sales ratio is 0.85 times and is on par with the industry median. However, Exxon Mobile's average PSR is 0.94 times. The company's trailing P/E ratio is 9.52 and the forward P/E is 11.8 times. The company's five-year average P/E is 11.6 times.


I think Exxon Mobil has reached its peak and the share price should remain flat or trade in a narrow range for the foreseeable future. If the P/E ratio were to drop to 8 times, I would be a buyer again. I will hold the shares I already own.

Disclosure: I am long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.