Stock of the Week
NYSE Symbol: XOM
Price as of 10/29: $66.49
The markets continue to perform well trading just under the April highs for the year. The averages feel like they're ready for a correction or at least a minor pause. Even though the averages have performed great, not all sectors or stocks have performed well. The financials remain one of the cheapest sectors and have been for a while. The commodity sector has been on fire for the last several months, but not all commodities are the same. Case in point, steel stocks has performed poorly due to a supply glut. The oil stocks have also lagged in this rally, but are starting to perk up. This week we'll feature the largest market cap company in the US. The stock of the week is Exxon Mobil. Exxon trades for a compelling valuation with a nice dividend yield of 2.6% and goes ex-dividend on November 9th. Plus this past week, during their earnings report, Exxon stated they will spend $5 billion in the fourth quarter alone on buying back their stock. HP made similar comments last month and their stock has performed well since then. The $5 billion share buyback should help support Exxon's for the rest of the year while also providing a nice dividend to shareholders.
For the third quarter, Exxon Mobil reported profits of $7.35 billion, or $1.44 a share, from $4.73 billion, or 98 cents a share, in the year-ago period. On average, analysts expected earnings of $7.2 billion, or $1.38 a share. Revenue increased to $95.3 billion from $82.3 billion. Exxon Mobil bought back $3 billion in stock during the quarter, and increased its capital spending on exploration and production by 35% to $8.8 billion. Management stated the strong quarterly results will allow them to advance their investment opportunities citing higher crude-oil and natural-gas realizations, improved refining margins and solid chemical results. This was the first full quarter following their $41 billion all-stock acquisition of domestic natural-gas producer XTO Energy. After the acquisition, Exxon Mobil said its U.S. natural-gas production nearly tripled to 3.73 billion cubic feet a day from 1.29 billion cubic feet. Oil equivalent production jumped 20% to 4.45 million barrels a day. Looking ahead, Exxon reiterated guidance and, as mentioned, expects to spend $5 billion in fourth-quarter on stock buybacks.
The $5 billion share buyback should help limit the downside in the stock in the fourth quarter. Exxon's stock also should appeal to long term investors. Currently the stock trades for 11 times current earnings and 10 times next years' earnings. The 2011 earnings estimates seem conservative particularly if the price of oil keeps moving higher. The stock also trades for 1 times sales and 2.3 times book value.
The dividend coming up in less than two weeks and billions spent on share buybacks this quarter makes Exxon a compelling stock pick for the rest of the year.