Exxon Equity Analysis

Exxon Equity Analysis

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Exxon Equity Analysis
1. INTRODUCTION

Exxon Mobil is world’s largest publicly traded integrated oil company serving companies in more than 200 countries worldwide. Standard and Poor’s stock report for Exxon Mobil indicates that Exxon’s global functional organization and substantial diversification helps mitigate its exposure to business risk and margin volatility.
As of December 31, 2007 Rex W. Tillerson has been serving as CEO of corporation since two years along with Senior Vice Presidents M. W. Albers, M. J. Dolan and D. D. Humphreys. They manage 51% institutional ownership of the company.
In terms of Equity Financing strategies, Exxon is implementing a continuous stock repurchase program rather than equity financing. In the first half of 2007, Exxon’s gross share purchases were worth $16 billion, reducing the shares outstanding by 3.2 percent. In 2006, Exxon Mobil paid out 1.77 percent of its stock price in dividends, about equal to the dividend yield for the entire S&P 500. Factoring in the $29.6 billion Exxon Mobil spent on buybacks that year, its yield jumps to 8.64 percent. Public companies share the wealth with investors mainly through dividends and stock buybacks, and both actions have historically benefited investor returns. Since both types of yield signify added value to shareholders, investors should be able to improve their odds in the market by harnessing the power of both statistics. Buybacks benefit shareholders by reducing the amount of stock, giving each remaining share a bigger slice of a company's earnings. Although U.S. policymakers claim that the company does not invest enough in new pumping capacity and spends too much on share buybacks, CEO Rex Tillerson reports that company disagrees with claims.
As company re-purchases on stocks essentially tells the market that they think that the company’s stock is undervalued. It is expected that this will have a psychological effect on the market. Also, the stock buybacks raise the demand for the stock on the open market.

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Thus, all those factors considered, Exxon Mobil is a BUY recommendation in stock market along with the analysis and data provided below.

2. OVERALL PAST PERFORMANCE

Exxon Mobil’s fundamental ratio analysis for Equity figures are represented in below table as it indicates clues about company’s aggressive growth strategies. In 2007, Exxon Mobil is heavily reinvesting to itself. As Exxon reports the record profit ever for a U.S. company $40.6 billion in 2007, they tend to reinvest to company majorly for expanding purposes around the world. Referring to the table below, market is willing to pay$12.87 for every single dollar amount sales generated by the company in 2007. Over three years trend, Exxon Mobil is continuously buying back common stock from market as the number of shares outstanding is declining. As they reduce outstanding available shares in market, and increase their earnings over three years trend, EPS is also increasing. By December 31, 2007 Exxon Mobil has $466,392 billion Market Capitalization along with the 1.07 Beta of the stock which indicates a growth orientation relatively to S&P 500 index.
Key Stock Statistics - XOM
52-Week Range $96.12-77.55
Trailing 12-months EPS $7.69
Trailing 12-months P/E 11.5
Common Shares outstanding 5,283.7 million
Market Capitalization $466.392 billion
Yield 1.81
Dividend Rate/Share 1.6
Institutional Ownership 51%
Beta 1.07
S&P Credit Rating AAA
Table 1 : Key Stock Statistics - XOM, end of year 2007
Key Ratios, EQUITY- XOM
2005 2006 2007
P/E 9.83 11.58 12.87
Price to Sales 0.96 1.21 1.29
Price to EBITDA 5.99 3.05 3.33
Price to Pretax Income 5.9 6.68 7.31
Dividend Payout Ratio 20% 19% 19%
Earnings(millions) 358,955 365,467 390,328
# of shares(millions) 62,864 54,793 53,616
Earnings per Share 5.71 6.67 7.28
Table 2: Key Ratios, Equity – XOM

3. FUNDAMENTAL ANNUAL GROWTH
a. Earnings per Share:


EPS (Earnings Per Share): Net income net of preferred dividends divided by a weighted average of total shares outstanding for the year including potential shares represented by options issued by the company. This figure is a useful snapshot of how much a company earned in a given year, and how much earnings power is represented by a shareholder's claim on the company. The measure is also useful relative to historical and forecast value as a way to evaluate the earnings growth potential for a company, and the historical and potential returns for a shareholder. This figure is found at the bottom of the company�s income statement

b. Equity per Share:


Equity/Share: This figure represents the company's accounting equity, also known book value per share of the company. Equity is a company�s total assets minus its total liabilities�in other words, what�s left over for shareholders. Equity per share represents the value of the assets of the company backing up each share of the company's stock. Growth in equity per share is one variable used to determine if a company is increasing shareholder wealth over time. Note, too, that because it's expressed on a per-share basis, equity growth per share takes into account dilution from new-share issuances.

4. FUNDAMENTAL FINANCIAL EFFICIENCY

a. ROE Analysis:


b. Return Analysis:



Return Analysis: This graph decomposes the total return per share into three components: change in earnings, change in price to earnings multiple, and dividend payments. The constant multiple line describes what the share price would be if the shares traded at the same price to earnings multiple as the beginning of the period, representing the return due to changes in earnings. When the share price line is above the constant multiple line, the price to earnings multiple is higher than the beginning of the period and when the share price line is below the constant multiple line, the price to earnings multiple is lower than at the beginning of the period. The total return line represents the value that a shareholder would have received from the beginning of the period, by adding the cumulative dividends paid since the beginning of the period to the share price.

5. FUNDAMENTAL FINANCIAL HEALTH

a. Debt/Equity:


Debt/Equity :Long-term debt divided by the accounting shareholders� equity. Increasing debt/equity means an increasing proportion of the company's assets are owned by debt holders, and represents increasing risk of bankruptcy if the company encounters operating difficulties; however, an increasing debt/equity ratio also increases returns to equity holders. This figure is not meaningful appropriate for financial companies.

b. Debt/Total Capitalization:


Debt/Total Capitalization: Long-term debt (excluding other liabilities) divided by total capitalization (the sum of common equity plus preferred equity plus long-term debt). Increasing debt/total capital means an increasing proportion of the company is owned by debt holders, and represents increasing risk of bankruptcy if the company encounters operating difficulties, however increasing debt to equity ratio also increases returns to equity holders. This figure is not meaningful for financial companies

6. PRICE PERFORMANCE OF STOCK IN 2007



7. HISTORICAL PRICE PERFORMANCE OF STOCK vs. S&P500 & U.S. MARKET

EXXON MOBIL XOM


U.S. MARKET


S&P 500





8. GROWTH OF $10,000 INVESTMENT in EXXON vs. S&P 500 & INDUSTRY

Growth of $10,000 YTD through 07-25-08


Stock: ExxonMobil Corporation

Industry: Oil & Gas

Index: S&P 500



Total Returns % 2003 2004 2005 2006 2007
Stock 20.6 28.0 11.8 39.1 24.3
+/- Industry -13.8 8.0 -13.2 18.6 -2.6
+/- S&P 500 -5.7 19.1 8.8 25.4 20.8

9. FREE CASH FLOW ANALYSIS

One of the first things to do when examining an investment idea is to review historical FCF trends. This exercise helps on the economic value producing potential of an enterprise. The below chart illustrates the major factors that affect stock price. In order to eliminate the unsystematic risk on the stock the Free Cash Flow trend gives strong idea of management efficiency of the corporation.





While calculating the FCFs of company, the following formula is used.

Free cash flow (FCF) = Operating cash flow (OCF) - Capital Expenditures (Cap-ex).
Annual XOM Free Cash Flow ($ Billions)
Year Operating Cash Flow Capital Expenditures Free Cash Flow
2002 21.3 11.4 9.8
2003 28.5 12.9 15.6
2004 40.6 12 28.6
2005 48.1 13.8 34.3
2006 49.3 15.5 33.8
2007 52 15.4 36.6
Table 3: Annual Free Cash Flow - XOM



You can see that XOM's operating cash flow has increased by about 150% over the past few years. During this period, capital expenditures have increased less than 50%. As a result, free cash flow has increased nearly fourfold, reaching nearly $37 billion in 2007.
10. ESTIMATED FUTURE VALUE OF XOM and RECOMMENDATIONS
Exxon Mobil is considered as a large-cap blend stock in the market orienting both growth and value strategies at the same time. Under such slow economic condition of market, Exxon Mobil is recommended as a “BUY” with 4/5 rating and an 12 month target price of $103.00 by Standard and Poor’s stock report for the company as of July 5, 2008. Also, the risk associated with the company is stated as “Low” as the assessments of S&P reflects Exxon’s diversified and strong business profile in volatile, cyclical and capital-intensive segments of the energy industry. S&P considers ExxonMobil’s earnings stability and corporate governance practices as above average.
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