ExxonMobil (XOM) is a great company with a terrific culture that puts an emphasis on shareholder value creation. Morningstar analyst and CFA Allen Good even calls ExxonMobil a superior capital allocator and operator that delivers higher returns on capital than its peers.
I agree and the facts back him up as the major leads its category in both RoE and RoIC. It did so in almost every year for the past 10 years:
Even though I have great respect for the company and its ability to execute I don't think the stock is a great opportunity for the next few years. It is simply too expensive from an absolute perspective trading at a considerable multiple to tangible book value but also when compared to peers. Exxon is easily the most expensive among a large peer group:
It is extremely rare you will hear executives say the stock of the companies they run is overvalued. However, ExxonMobil reportedly put in a bid for InterOil (IOC), and that's what its actions are telling us.
Source: Azquotes
The supposed disciplined capital allocators at Exxon are getting mixed up in a very public auction of these InterOil assets that already have a suitor – the opposite of how to make disciplined purchases.
According to the Reuters article, "Exxon's interest, which has not yet been made, is comprised of Exxon stock as well as a contingent value right. The offer should be worth at least $2.2 billion."
What betrays it is the offer of Exxon stock. Why pay with stock? According to the company's latest 10-Q Exxon holds $10 billion in cash. The company could wire the purchase price of InterOil just like that. It could also finance the purchase with some additional bank debt or bonds. Exxon should be able to finance $2 billion at something like 2% interest judging by where its bonds are trading.
Instead it chose to pay in stock.
There is only one reason a team of disciplined capital allocators is engaging in a public auction and paying with stock. They believe their own stock is substantially overvalued and will shrewdly trade it for less overvalued assets. Taken all together, valuation and management actions, my preferred position is to hold no Exxon stock, its many qualities notwithstanding.
Disclosure: No positions.
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