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Research Analysis of Exxon Mobil (XOM)
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.

The three methods used in this analysis are:

1) Price to Owners Earnings (OE) = Current and future analysis

2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings

3) Statistical Indicator Analysis (SIA) = Historical price action

For those new to this analysis please link here for an introduction:

OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx

SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx

CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx



The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).

Analysis of Exxon Mobil

Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;




XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.

The way you do that is look to future OE and we do this by estimating 2010 OE.

Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;




In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.

If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.

As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.

The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."





So we now have three separate sell prices;

1) P/OE = $109.50

2) COE = $101.10

3) SIA = $ 89.82

Total = $300.42/3 = $100.14 = Sell Price

Buy Price = $50.07

Conclusion = XOM is a Strong Hold

Disclosure: Long AIR, No Position in XOM

Disclaimer:

Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.


By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902GeaSphere