(Exxon Mobil) (XOM)
Overview of the Company - Exxon Mobil (XOM) is involved in the transportation, refinement, and production of crude oil. They also produced petroleum products and are based in Irving, Texas. It is important to note that Exxon was among the most valuable companies in terms of market cap, but has halved since ‘07 - from around $520 billion to around $255 billion currently. Just 7 years ago in 2013, ExxonMobil was the most valuable in the world by market capitalization. Now, Exxon is around the top 30 most valuable companies in the world and Apple owns the top spot with a market cap of over $2 trillion dollars.
Fundamental Analysis - Exxon Mobil is an old giant that is looking to make a comeback. Boasting its massive dividend and infrastructure XOM is ready to benefit from an expanding economy that will need petroleum products and oil to travel. With the price of oil comfortably over the $70’s it's just more proof that Exxon will experience heavy demand.
How (XOM) Stacks Up to Competitors - We will be comparing Exxon Mobil with Chevron (CVX), Marathon Oil Corporation (MRO), and Marathon Petroleum Corporation (MPC). Like Exxon, Chevron is not only involved in the production of oil, but the transportation of it and petroleum products. Marathon Oil (MRO) and Marathon Petroleum (MPC) are more specifically involved in solely the refining, transportation and production of petrol. All four companies' main market is the United States. XOM and MRO both have negative EPS, while CVX trades at around 55 times earnings, and MPC at 11 times. From an enarings standpoint, MPC seems like the only one to be trading at a reasonable premium. Additionally, XOM, CVX, MRO, have massive debt in relation to their cash levels. However, these companies have their massive infrastructure under their control going for them. As a result they have very good book value in relation to the price that they trade at. MRO barely trades at above book value. Essentially, these companies are not very profitable but are still able to maintain their current valuation because of their massive infrastructure that they have built in the past. These companies add to their attractive features by issuing massive dividends. XOM gives almost a 6% dividend, CVX at 5% and MPC at 3.75%. MRO lags with a 1.4% yield.
Bull Case - Every quarter you are getting paid almost 1.5% in dividends. This is attractive for dividend investors, along with the fact that Exxon has such massive infrastructure that it makes its book value extremely large. With the resurgence of the economy and the surge of summer coming, Exxon should be able to post positive EPS this quarter and the next. That will grow at a steady rate as crude gets comfortable around $70-$75 a barrel. This indicates high demand for the juice of dinosaurs and demonstrates that Exxon will have plenty of customers and can build on their solid base.
Bear Case - Exxon trades at way too high of a multiple. Even if they are able to sustain positive EPS, they will need to spend so much cash paying their dividends and debts to sustain themselves. Additionally, investors are inadvertently depending on external factors and politics as these stocks trade very closely with the price of oil. If the system is flooded by supply or polivalt movements, prices of oil can plummet, affecting these companies. Not to mention the massive debts and negative connotation these environmentally unfriendly companies have, investors should heavily consider not only sit this out on this stock, but oil stocks in general.
Valuation and My Price Target - If Exxon is able to continue its positive EPS per quarter, we could see XOM with a EPS of around $6. This means that Exxon will trade at around a 10 multiple to its current price. I think that with the resurgence of the economy, Exxon can afford to trade around 11 times earnings in the future. This brings the target to $66 - around 10% returns from here. With 6% in dividends, annualized returns should be around 16%.
The Verdict - BUY HOLD SELL
Even though I used conservative estimates for Exxon’s future P/E, Exxon will have to be able to pay for all of its dividends and get out their negative P/E ratio. This is a large road to climb, with so many external factors and negative connotations associated with these companies I think it is hard to justify buying into Exxon with only a 16% ROI in the next year. However I think that Exxon or Chevron does have a place in your portfolio if you don't have any exposure to oil. Taking a small portion of your portfolio and putting it into oil stocks is good diversification and a way to play the economic upturn. However if you already have good diversification, Exxon is a company that you can afford to live without, for now XOM is a HOLD.
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