Exxon Mobil (OP/A): Volatile trading creates buying opportunity for fundamental, long-term investors - Goldman Sachs - October 27, 2005
We reiterate our OP/A rating on Exxon Mobil and believe the uncharacteristic volatility in its shares creates an excellent buying opportunity for fundamental, longer-term investors. If there is ever a company where it is not about the quarter or the most recent incremental data point it is Exxon Mobil. In our view, Exxon Mobil is perhaps the best positioned company to take advantage of the strong but volatile commodity prices. We continue to have significant confidence that its management team will reinvest cash flows wisely, with the goal of maximizing long-term growth in shareholder value. In our view, an under 9X P/E multiple on 2006 EPS is way too low for the stock market's leading company. A 12X P/E would correspond to 44% total return upside to a $80 stock price.
EXXON MOBIL SHARES TRADING AT AN INEXPENSIVE 8.5X 2006E P/E
For a company investors often gripe is "too expensive", Exxon's current valuation looks remarkably inexpensive. The shares are trading at just 8.5X on 2006E P/E and at 6.1X 2006E EV/DACF. While it is true that many oil sector equities look even more inexpensive, the difference with Exxon Mobil is its status as the leading stock in the US market. Certainly, the S&P 500 is not trading at 8.5X its earnings. While we agree that commodity prices are higher than the levels most consider to be "normal" over the long term and that a cyclically lower P/E is appropriate, we believe that as investors gain confidence that commodity prices can stay above normal over the next few years that XOM will garner a higher valuation.
In our view, it would not be surprising to see Exxon Mobil ultimately trade up to at least a 12X P/E on our 2006E EPS estimate of $6.65, which would correspond to an $80 stock price offering 44% total return upside potential. Such a valuation would be consistent with its traditional cyclical peak valuation.
We believe the key catalyst to Exxon shares moving materially higher and regaining positive upward momentum relate more to general sector trading rather than anything Exxon specific. To the extent investors become more comfortable with the notion that commodity prices will stay firm in the years ahead, we believe Exxon Mobil can get re-rated higher, especially since investors likely retain a high level of confidence in Exxon's use of free cash flow. We see the stock as being the low beta portfolio balancer to a basket of our high-beta favorites.
IGNORE QUARTERLY NOISE
There is no change to our favorable fundamental view of ExxonMobil in light of the 3Q 2005 EPS shortfall, which we consider to be quarterly noise magnified by the catastrophic hurricanes. Exxon Mobil reported 3Q 2005 EPS of $1.32, below the $1.38 First Call mean and our $1.40 estimate. E&P performance was largely as expected, with the shortfall coming from refining & marketing (R&M) and chemicals. In R&M, we believe weak retail gasoline marketing results drove the bulk of the negative variance. None of this do we think is material to the outlook for Exxon Mobil shares.
UPDATED ESTIMATES
We have lowered our 2005 EPS estimate to $5.31 from $5.40 to account for the 3Q shortfall. There is no change at this time to our $1.62 4Q 2005 EPS estimate. We have lowered our respective 2006 and 2007 EPS estimates to $6.65 ($6.85 before) and $6.95 ($7.13 before) to reflect a slightly weaker outlook for chemicals than previously assumed. There is no change to our 2008-2010 normalized EPS forecasts of $3.65, $3.88, and $4.12, respectively. Exhibit 1 shows our summary financial model for Exxon Mobil.
I, Arjun Murti, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. |
