Exxon Mobil Looks Like It May Have More Downside

| About: Exxon Mobil (XOM)
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Summary

XOM is a terrific, well-diversified energy name with strong fundamentals.

But with oil crashing continuously, earnings will be negatively affected.

The dividend is solid, and is a separate reason to potentially own the stock.

I think earnings estimates are too high and that XOM is worth around $80 right now.

Shares of energy behemoth Exxon Mobil (NYSE:XOM) have been hammered in recent months, along with just about any other company that has even thought about oil or gas. The market is indiscriminately punishing energy stocks regardless of the actual impact the fall in oil prices will have on their income statements next year. But despite the carnage in the energy space, XOM has actually held up pretty well considering the damage that has been done to others. The company is still in the midst of a multi-year rally that has made shareholders a lot of money; so in this time of tumult, is XOM still a safe place to park your money, or is it time to move on to greener pastures? In this article, I'll take a look at Exxon Mobil to see if it should have a place in your dividend portfolio.

To do this, I'll use a DCF-type model you can read more about here. The model uses basic inputs including earnings estimates, which I've taken from Yahoo, dividends, which I've set to grow at 3% per year, and a discount rate, which I've set at the 10-year Treasury rate plus a risk premium of 5.75%.

2013

2014

2015

2016

2017

2018

2019

Earnings Forecast

Prior-year earnings per share

$7.37

$7.61

$6.16

$6.37

$6.58

$6.80

x(1+Forecasted earnings growth)

3.30%

-19.10%

3.38%

3.38%

3.38%

3.38%

=Forecasted earnings per share

$7.61

$6.16

$6.37

$6.58

$6.80

$7.03

Equity Book Value Forecasts

Equity book value at beginning of year

$42.65

$47.50

$50.82

$54.26

$57.83

$61.52

Earnings per share

$7.61

$6.16

$6.37

$6.58

$6.80

$7.03

-Dividends per share

$2.76

$2.84

$2.93

$3.02

$3.11

$3.20

=Equity book value at EOY

$42.65

$47.50

$50.82

$54.26

$57.83

$61.52

$65.36

Abnormal earnings

Equity book value at beginning of year

$42.65

$47.50

$50.82

$54.26

$57.83

$61.52

x Equity cost of capital

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%

8.00%

=Normal earnings

$3.41

$3.80

$4.07

$4.34

$4.63

$4.92

Forecasted EPS

$7.61

$6.16

$6.37

$6.58

$6.80

$7.03

-Normal earnings

$3.41

$3.80

$4.07

$4.34

$4.63

$4.92

=Abnormal earnings

$4.20

$2.36

$2.30

$2.24

$2.18

$2.11

Valuation

Future abnormal earnings

$4.20

$2.36

$2.30

$2.24

$2.18

$2.11

x discount factor(0.08)

0.926

0.857

0.794

0.735

0.681

0.630

=Abnormal earnings disc. to present

$3.89

$2.02

$1.83

$1.65

$1.48

$1.33

Abnormal earnings in year +6

$2.11

Assumed long-term growth rate

3.00%

Value of terminal year

$42.26

Estimated share price

Sum of discounted AE over horizon

$10.87

+PV of terminal-year AE

$26.63

=PV of all AE

$37.50

+Current equity book value

$42.65

=Estimated current share price

$80.15

We can see the model produces a fair value of about $80, substantially lower than the $89 shares trade for as I write this. That would imply that XOM is pretty well overvalued right now, but what is the model saying? The idea behind the model is to provide investors with a fair value price that affords a margin of safety when getting long. Since XOM is trading more than 10% above that price, it is implied that the stock is overpriced right now. But let's look a bit more closely at XOM, as there might be more at play here.

To start, XOM is a world-class business. The company is unbelievably profitable, producing in the neighborhood of $40 billion in net income each year, and it does it through scale and diversification. XOM has terrific scale from is massive size, and it is a very diversified energy name, having its hands in every piece of the process. But the point stands that XOM's net income is tied strongly to the price of oil; and when oil drops as precipitously, as it has in the last six months, XOM is going to feel it.

I mentioned in the open that XOM has held up pretty well during the energy rout, and it has; the stock is down about 15% from its year highs, and while that's not desirable, considering many energy names have been cut in half, it's really not that bad. I think it speaks to the breadth and depth of the business and the fact that XOM has been here before and come out the other side with tens of billions in profits.

But I also think the market is being too generous to XOM right now. The last time we saw oil prices get crushed like this - 2009 - XOM's net income was cut in half from the prior year. I'm not suggesting that will happen this year, as the drop hasn't been nearly as tough as it was following $147 oil, but the point stands that XOM's profits will suffer mightily next year if oil prices do not recover. I don't think the market is accounting for just how far EPS could fall if we see continued weakness in oil.

Speaking of weakness, the chart of XOM versus its peer group in the Dow 30 (NYSEARCA:DIA) pretty much sums up what energy has been doing since the summer.

The stock has not only been beaten down on a nominal basis, but like the other energy names, has vastly underperformed the broader market. We see XOM has been a bit of a dog of the Dow for a few years now, but that underperformance has accelerated in a big way in the last six months during the oil sell-off. Unfortunately, I don't see any reason this underperformance will reverse, and I think we'll see this chart continue to get worse before it gets better.

XOM's business is resilient, but it's not immune from oil prices. I don't think the stock has fallen far enough considering the way fundamentals have changed and that we've got downside to $80 or so. The company's dividend is likely keeping shares buoyed right now, but the yield isn't high enough for that to make sense given the weak backdrop of oil prices. XOM's profits will suffer mightily in 2015 if oil doesn't recover, and with the dividend at the five-year average, we aren't seeing value there either. We need more selling to make XOM attractive, because right now it's expensive with the backdrop of weak energy fundamentals and a historically average dividend yield. If we see a sell-off to $80 or below, XOM will represent a good value, but until then, I think there is too little reward for too much risk.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.