The Capital Structure box on the Value Line research report for Exxon Mobil (XOM – Free Stock Report on Exxon Mobil) lists the company’s market capitalization as about $350 billion. That’s 350 followed by nine zeros—an absolutely massive number that sets Exxon apart from virtually all other companies. It is easily the largest publicly traded participant in the integrated oil and gas industry. Does shear size, however, make this behemoth worth owning?
There are a great number of benefits to owning large companies, but there are also negatives. Often, the benefits and negatives show up together in statements that contain the word “but.” For example, Exxon Mobil has the financial wherewithal to invest in new technology without it hurting the bottom line, “but” nascent technologies often have little impact on such a large company.
An excellent example of this conundrum is a recent push by the company into biofuels. Exxon plans to invest up to $600 million in research to examine the harvesting of algae to make a crude oil substitute. To some companies that sum of money would be massive; to Exxon, which earned $275,564,000,000 in 2009, a number that can be found in the historical portion of the Statistical Array, it’s a drop in the bucket. Moreover, such a relatively small investment isn’t likely to change much for the company no matter how revolutionary or exciting the research happens to be.
A really big impact on the top and bottom lines of a company as big as Exxon Mobil takes either years, or perhaps decades, to show up or, more likely, comes about through some sort of transformative purchase or merger. The combination of Exxon and Mobil is probably the most obvious example, but the recent purchase of XTO Energy is a more recent one. As outlined in the Analyst Comment, the purchase has been viewed negatively because it will be slightly dilutive to earnings in the first year. However, the acquisition, which cost more than $40 billion, materially expands Exxon’s gas assets and gives it access to technology that it will likely be able to use in its operations throughout the world. Value Line analyst Robert Mitkowski believes the deal will prove positive over the longer term.
The ability to foster change is an important aspect to consider here, too, because growing revenues and earnings can also be difficult for such a large company. Indeed, Mitkowski projects a material slowdown from the impressive annualized historical growth rates of 12% for revenues and 17% for earnings over the trailing ten years (found in the
Annual Rates box on the left of the Value Line report). In fact, he’s projecting just 7% growth in revenues and 6% in earnings over the next three to five years—a material departure from the past. Still, these earnings projections translate into an annual total return range, which includes dividend payments, of 11% on the low end and 17% on the high end (these statistics can be found in the Projections box to the left of the Graph). Although a far cry from the expectations one might have for a small and nimble growth company, projected returns in the low double digits are quite impressive for an enterprise the size of Exxon.
Couple these projections with the company size and financial stability and a strong case begins to emerge for conservative investors looking to own this integrated energy provider. Some of the many attractive attributes for safety include the extremely low level of debt on the balance sheet (about 10% of the market cap is attributable to debt, as can be seen in the Capital Structure box), a massive cash hoard of over $12 billion (as noted in the Current Position box, which is just under the Current Position box), and high scores for Value Line’s proprietary Stock Price Stability and Price Growth Persistence measures (both of which can be reviewed in the Ratings box at the bottom right of the page). All of this leads to top tier Financial Strength (found in the Ratings box) and Safety ranks (found in the Ranks box at the top left of the report).
In terms of valuation, Exxon Mobil’s current Price to Earnings ratio, found in the Top Label section of the report running across the top of the page, is toward the low end of the company’s historical range—a fact that can be seen by comparing the current 11-12 P/E with the Average Annual P/E Ratio line in the historical portion of the Statistical Array. Moreover, the dividend yield of about 2.5% is nearer the high end of recent history than the low. Although this is partly a reflection of the price decline since the start of the recession (shown by the shaded area in the Graph), it is also a result of continued dividend increases—the company has increased its dividend in every calendar year presented in the Statistical Array.
Exxon Mobil isn’t likely to interest an investor with an appetite for more rapid growth and the inherent risks that such accelerated growth entails. However, more conservative investors seeking broad exposure to the oil and gas industries would be well served giving Exxon Mobil shares a lengthy look.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.