Stock of the Week
NYSE Symbol: XOM
Price as of 2/26: $65
The markets were up and down this week similar to the way this year as transgressed. In a flat market like this it's always nice to have a few positions that pay dividends so you get paid while you wait for the market to rebound. This week we'll feature a Dow component that has underperformed so far this year and the last two years even as earnings keep going higher. The stock of the week is Exxon Mobil. Thanks to a plethora of mergers Exxon has become a giant, generating $400 billion in sales and $27 billion in profits a year. A couple of years ago when oil went though the roof, the company was generating $10 billion in profits a quarter and Congress was debating an excise tax on their profits. However, oil has come back down to more reasonable levels, the public unrest has eased, yet the stock has gone nowhere over the last 3 and a half years even though the earnings and the dividend payout have improved. Investors looking for a commodity play trading at a low valuation, providing a good dividend, would be hard pressed to find a better stock than Exxon Mobil.
On February first Exxon topped Wall Street expectations by 8 cents thanks in part to their natural gas projects. Net income fell 23% to $6.1 billion as Exxon had to absorbed a loss in its refining operations. Sales
rose to $89.8 billion from $84.7 billion, as crude-oil prices climbed from year-ago levels. During the quarter, Exxon boosted production by increasing its spending on capital projects. The highlight for Exxon Mobil came from their largest unit, the upstream business specializing in production of oil and natural gas, earning $5.78 billion, up by $146 million. Natural gas production in Asia Pacific and the Middle East rose 31% which is where a lot of their growth came from. Exxon looks to expand their natural gas business closer to home with the $30 billion acquisition of XTO Energy, a big bet on North America's fast-growing natural gas industry. The refining business remains in a slump. Exxon Mobil's huge refining and marketing business swung to a fourth-quarter loss of $189 million, from a profit of $2.6 billion last year. During the
quarter, Exxon Mobil bought back $2 billion in stock, compared to $8 billion in share buybacks a year ago.
Among the commodities, Exxon's stock is cheap. Currently the stock is trading for 11 times earnings, 9 times next years earnings, 1 times sales, and 3 times book value and sports a 2.6% dividend yield. Collins Stewart upgrades Exxon Mobil to a buy from an hold two weeks ago with an $80 target saying they believe Exxon's risk-reward balance is compelling since the company announced its $41 bln acquisition of natural-gas producer XTO Energy. Since the announcement Exxon has jettisoned nearly $40 billion in market cap, close to the value of the entire transaction. The firm now believes that Exxon is positioned to perform well. The underlying fundamentals should support share price upside from current levels. The analyst also believes Exxon's defensive characteristics, such as its AAA credit rating, strong balance sheet, generous free cash flow generation, and consistent dividend increases, may appeal to investors should risk appetites wane.