Exxon Mobil Corporation (NYSE:XOM) released third-quarter earnings on November 1, 2012 and although the numbers were down a bit year over year, the company managed to beat analyst expectations for the current quarter. Earnings-per-share estimates called for $1.96 a share and the company reported $2.09. Revenues of $115.7 billion beat estimates of $115.08 billion. With global economies in turmoil and the price of oil declining, the 1.9 percent year-over-year drop in EPS and 7.7 percent decline in revenue came as no surprise.
Couple that news with the mad dash to the exit doors following the presidential election and you have the ingredients for a downturn. XOM dropped 4.6 percent through the close of trading on Friday November 16.
Is it time to BUY Exxon on this dip? Exxon generates more revenue than any other company on the planet, and its market capitalization now runs second only to Apple (NASDAQ:AAPL). Is it time to WAIT and SEE what happens to global demand and the price of crude oil? Or is it time to simply STAY AWAY and look for companies with better growth opportunities?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
The big drivers of the current drop are fiscal cliff fears and tax rates. Return to recessionary conditions will not be good for anyone and investors concerned about higher capital gains and other taxes in 2013 are cashing in right now. Once that selling has subsided, buyers may return to pick up the pieces. There is a potential for a major upward surge in the unlikely event the Congress actually gets its act together and passes a long-term deal like the grand bargain that fell into the trash bin of history last year. Don’t hold your breath, but anything is possible. A nice move upward in trading on November 19 may be a harbinger of good things to come.
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H = High Quality Pipeline
In the oil business, pipeline means proven reserves and exploration assets. For Fiscal Year 2011, Exxon reported proved reserves of crude oil, natural gas liquids, synthetic oil, and natural gas of 25 billion barrels. Despite what you read about Peak Oil, numbers like these coupled with Exxon’s ongoing exploration and acquisition activities are a good sign Exxon will be around for decades as smaller rivals fall by the wayside.
E = Equity to Debt Ratio is Close to Zero
Exxon has a strong balance sheet with low debt to equity ratio of 0.07 and more total cash on hand of $13.1 billion than total debt of $12.4 billion. Smaller rival Conoco Philips (NYSE:COP) has debt to equity at 0.42 with total debt of $24.9 billion against only 1.3 billion total cash on hand. Larger competitor Chevron (NYSE:CVX) also has a strong balance sheet with total debt of 12.3 billion against total cash of $21.6 billion and a debt to equity ratio at .09.
A = A-Level Management Runs the Company
Faced with the prospect of dwindling reserves of conventional sources of oil and gas, Exxon management went unconventional and bought XTO energy, a major player in shale exploration and production in 2010 and XOM is not done buying yet, turning their eyes northward to Canada. That is the kind of move a forward-looking thinking A Level Management Team makes. In the short run some question the move, but no one anticipated the unbridled success of shale that drove producers to oversupply and prices to drop. This move bodes well for Exxon’s future.
T = Technicals on the Stock Chart are Strong
Exxon’s share price has risen about 12 percent year-over-year but some of the technicals are getting a bit shaky. As of November 16, 2012, the stock price is 33.4 percent below its 20 Day Simple Moving Average; 4.4 percent below the 50 Day SMA; and 1.35 percent above the 200 Day SMA. The Relative Strength Indicator has been creeping south since late October and is now nearing the 20 level used by conservative investors as a signal of an oversold condition.
S = Support is Provided by Institutional Investors & Company Insiders
Exxon Mobil is 49.8 percent institutionally owned. The top five holders are Vanguard Group, BlackRock Institutional Trust, Bank of New York Mellon, Fidelity Investments, and Wellington Management.
E = Earnings Are Increasing Quarter over Quarter
Over the past 5 years, XOM has increased earnings 4.95 percent, which bests rival BP plc (NYSE:BP) with an increase of 3.94 percent Both trailed the performance of Chevron at 11.5 percent. Over the most recent 5 quarters Exxon has been relatively consistent, showing EPS of $2.13; $1.97; $2.0; $3.41; and $2.09.
E = Excellent Relative Performance to Peers
Exxon’s Return on Equity of 27.48 percent handily tops rivals Chevron at 18.96 percent; BP at 15.56 percent; and Conoco Philips at 12.5 percent. Year over year, the XOM’s share price has outperformed its rivals as well, rising 12.09 percent versus at a 3.31 percent increase at Chevron; a 4.05 percent loss at BP; and a 4.9 percent gain at Conoco Philips.
T = Trends Support the Industry in which the Company Operates
The oil and shale revolution has literally turned the US energy future upside down. In a recent World Energy Outlook (WEO) report, the International Energy Agency (IEA) predicts the US will eclipse Saudi Arabia as the world’s leading oil producing nation. Some disagree, but it appears the US is on its way towards achieving a goal that heretofore existed only in the realm of political rhetoric – energy independence.
Exxon has been paying a healthy dividend for a long time and the future of energy in this country is the brightest it has been in a long time. For the vast majority of investors, EXXON should be a BUY. However, Hurricane Sandy has injected a worm of doubt into the minds of many who believe global warming is a hoax and nothing can be done about cyclical climate change anyway. Australia recently became one of more than 30 countries around the world to initiate a carbon tax. They will have a “cap and trade” scheme in place in a few years similar to what was proposed here in the US, but failed to gain necessary support. That may change now. Although Exxon could adapt to that eventuality, it would probably cause a downward movement in the share price.
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