I’ve never been a fan of Exxon Mobil Corporation (NYSE:XOM) stock. I’ve never thought Exxon stock was a bad play, necessarily. Rather, I’ve just long struggled to see much of a bull case.
The biggest problem, as I wrote more than a year ago, is that Exxon stock actually is a pretty poor play on oil. The combination of upstream (oil and gas exploration) and downstream (refining and retail operations) tend to offset over time.
In a falling-price market, that’s actually a good thing. XOM stock handily outperformed the energy sector as a whole amid the O&G crash of the past few years. But for investors betting that prices will rise, producers like Anadarko Petroleum Corporation (NYSE:APC) make much more sense.
The second problem is that Exxon stock has struggled against other diversified majors. Over one-, three-, and five-year periods, XOM has underperformed Chevron Corporation (NYSE:CVX), ConocoPhillips (NYSE:COP) and BP plc (ADR) (NYSE:BP).
So if an investor sees energy prices moving higher, producers are the wiser choice. (I still think Chesapeake Energy Corporation (NYSE:CHK) is the best, if highest-risk, play on that thesis.) Among diversified players, XOM has disappointed. Heck, over the past five years, even including dividends, Exxon shareholders have barely got their money back.
And yet, at the moment, I think Exxon stock is a buy. In fact, I bought some myself today.
Exxon Stock Is Too Cheap
I’m not sure the Exxon story has changed all that much, but the price certainly has. XOM stock has fallen over 11% so far this year, and about 16% from late January highs.
It’s a huge move that has pushed XOM to a two-year low. Admittedly, it’s not enough to fix all Exxon’s problems. Its capital spending is rising, while that of peers like BP is falling. Production figures have disappointed. CEO Darren Woods has a lot of work left to do.
But price matters. On a P/E basis, Exxon stock is as cheap as it’s been in years. Its dividend yield of 4.1% is the highest it’s been since the early 1990s. Given history, a raise should be announced in April. Assuming the quarterly payout moves to $0.79 from $0.77, the effective yield would be over 4.2%.
Even with Treasury yields moving up toward 3%, that payout should be hugely attractive to income investors, from a stock that, again, has heavily hedged earnings.
The chart here is ugly, but XOM has stabilized in the $74 range. Simply getting a dividend hike and moving Exxon stock back to a 4% yield would get shares to $79 — about 6% upside. That’s a reasonable near-term target and enough to buy the dip here.
Will Growth Return for XOM Stock?
So the case here is to make a trade and keep an open mind as to whether XOM stock might actually become a good investment. And there are some reasons for optimism. Woods announced on Wednesday a plan to double earnings by 2025.
Now, as James Brumley pointed out, there are myriad reasons for skepticism toward that goal. And it’s truthfully not even that impressive, suggesting roughly ~10% annual profit growth over that time (and assuming that oil prices stay relatively flat). But here, too, price matters.
Assuming XOM hits those targets, and earnings then moderate, DCF calculations suggest XOM stock should trade in the range of $100 — about 35% upside. As Brumley writes, investors don’t trust the targets, but that’s precisely the point. At less than 16x forward EPS, investors are pricing in basically zero growth at all for Exxon Mobil.
Certainly, that’s possible. If Tesla Inc (NASDAQ:TSLA) indeed leads an electric-car revolution, demand for oil and gasoline could plummet. Exxon Mobil has become more open, and more aggressive, about carbon emissions and is looking toward biofuels and natural gas as a result.
But aggressive worldwide energy cuts are likely to impact the company in some way. The biggest long-term risk to Exxon stock is not that the company’s earnings flatten, but that they’ve already peaked.
From here, though, it still looks like oil and gas will be a big part of the world’s energy needs, for better or worse. And that should be enough to keep Exxon Mobil in position to drive some growth. If Exxon hits its targets, great. If not, with downside risk internally hedged, a dividend over 4%, and its cheapest valuation in years, even “some growth” is good enough.
That’s why the decline in XOM to $74 has changed my mind. Price matters. And at this price, Exxon stock looks too cheap.
As of this writing, Vince Martin is long shares of Exxon Mobil and has no positions in any other securities mentioned.
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