The Market Is Betting Big on XOM - What's the Catch?

Oil & Gas Integrated company Exxon Mobil is standing out today, surging to $110.83 and marking a 3.1% change. In comparison the S&P 500 moved only 2.2%.

XOM currently sits within range of its analyst target price of $109.88, which implies that its price may remain stable for the near future.

Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Exxon Mobil shares have outperformed the S&P 500 by 84.2%, with a price change of 66.8%.

Exxon Mobil Corporation explores for and produces crude oil and natural gas in the United States and internationally. The company is an energy company. As investments, energy companies may display higher than average volatility because the price and availability of basic materials needed for production is dependent on geopolitical events. The shift towards renewable forms of energy may lessen this dependency, but is far from complete and may involve new risks of its own.

Exxon Mobil's trailing 12 month P/E ratio is 12.1, based on its trailing Eps of $9.14. The company has a forward P/E ratio of 10.2 according to its forward Eps of $10.87 -- which is an estimate of what its earnings will look like in the next quarter.

As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US energy companies is 9.11, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Exxon Mobil's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.33. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing XOM's growth potential .

To better understand the strength of Exxon Mobil's business, we can analyse its gross profits, which are its revenues minus its cost of goods sold only. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.

XOM's gross profit margins have averaged 31.9% over the last four years. While not particularly impressive, this level of margin at least indicates that the basic business model of the company is consistently profitable. These margins have slightly increased over the last four years, with an average growth rate of 0.2%.

Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Exxon Mobil's last four annual reports, we are able to obtain the following rundown of its free cash flow:

  • 2021 free cash flow: $36,053,000,000.00
  • 2020 free cash flow: $-2,614,000,000.00
  • 2019 free cash flow: $5,355,000,000.00
  • 2018 free cash flow: $16,440,000,000.00
  • Average free cash flow: $13,808,500,000.00 %
  • Average free cash flown growth rate: 421.0 %
  • Coefficient of variability (the lower the better): 121.4 %

With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in XOM have received an annualized dividend yield of 3.3% on their capital.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Exxon Mobil's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2, so the company's assets may be overvalued compared to the average P/B ratio of the Energy sector, which stands at 1.45 as of the third quarter of 2022.

Exxon Mobil is by most measures fairly valued because it has an inflated P/E ratio, an average P/B ratio, and an irregular stream of positive cash flows with an upwards trend. The stock has mixed growth indicators because it has a a PEG ratio of less than 1 and consistently average gross margins that are stable. We hope you enjoyed this overview of XOM's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.