Exxon came into my idea pipeline through a review of Morningstar’s 5-star, wide moat stocks. It currently trades at $61. Please refer to the Quick review explained post if you have questions on what I look for in this analysis.
1- Business Performance Risk (=/-) and intrinsic returns (+)
XOM’s business is – by nature – volatile and while it has had a good run over the last 10 years, the recent lower results are a reflection of the potential downside in such cyclical companies/industries. If I were to invest I would be looking for a high margin of safety to counterbalance the cyclicality risk
2- Balance Sheet Risk (+)
XOM carries virtually no debt and has a low current ratio which could call liquidity into question. However the company is so large and has so much cash on hand ($13B) that I doubt liquidity is really a risk here.
3- Valuation Risk (=)
While XOM appears conservatively valued from a P/E perspective, its cash valuation is high with only 5% cash returns…which is too low to provide a sufficient margin of safety for an investor
Conclusion
XOM is in a cyclical business in which I would only invest with a large margin of safety – however the current valuation does not seem to offer such a margin… I will not perform a company analysis and will pass on the stock.
Many happy returns!
Ben
http://marginofsafetyinvesting.com
1- Business Performance Risk (=/-) and intrinsic returns (+)
| Metric | Status |
| FCF / Sales | Last twelve months: 4.5%, below historical performance between 6% and 9%, but above last year’s poor performance of 2% |
| ROE | LTM: 20%, at the low end of historical performance averaging ~39% |
| ROA | LTM: 10%, lower than the average of the last 5 years (16%), but in line with industry overall |
| Revenue Growth | Growth seems to be volatile. On a 10 year basis it was ~7% in 2009, down from previous averages of >10%. The company’s year over year growth itself is quite volatile with years at 20%+ and others negative! 2009 was down 35% (!!!!) year over year. |
| Cash distribution to shareholders | XOM’s current dividend yield is 2.8% (in line with that of the S&P). The payout appears very volatile given XOM’s earnings volatility but is about 25% over the last 3-4 years. Over the last 5 years, the company has repurchased about 24% of its own stock |
2- Balance Sheet Risk (+)
| Metric | Status |
| LT Debt / Equity | 0.1x |
| Current Ratio | 1.1x below the company’s long term average of 1.4x – 1.5x |
3- Valuation Risk (=)
| Metric | Status |
| Cash Return | 5.0% |
| P/E | 11.7x, below the industry (12.8x), the S&P (13.7x) but in line with XOM”s average over the last 5 years of 12.1x |
Conclusion
XOM is in a cyclical business in which I would only invest with a large margin of safety – however the current valuation does not seem to offer such a margin… I will not perform a company analysis and will pass on the stock.
Many happy returns!
Ben
http://marginofsafetyinvesting.com
