Inside Wall Street: ExxonMobil Is a Bargain of a Behemoth

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Gene Marcial's Inside Wall StreetThe big blue chips, including the major oils, haven't been so hot in this turbulent market. So, investors looking to spot hidden bargain stocks will probably overlook ExxonMobil (XOM). One of the world's largest corporations and the largest publicly traded integrated oil company, ExxonMobil has been relegated to the out-of-favor bin, despite its solid balance sheet, 2009 revenues of some $300 billion and net income of $20 billion.

ExxonMobil's stock is trading at $60 a share -- just about where it was in March 2009 when the market plunged to its low. Crude oil prices also hit bottom around then at about $40 a barrel. Since that time, the S&P 500 has rebounded, just about doubling, and oil prices have shot up to $74. Not ExxonMobil – it's still languishing.

ExxonMobil Chairman and CEO Rex Tillerson expressed his own frustration and disbelief over the stock's poor performance in a Sept. 1 meeting with a small group of analysts who track the company.

That's starting to catch the eye of bargain-hunting investors, who believe ExxonMobil has become more attractive than ever. They figure the oils won't be in disfavor forever and that ExxonMobil would be the chief winner when the recovery takes hold and oil stocks come roaring back.

"Plenty of Upside Potential"

In general, Wall Street has stayed upbeat on the stock in spite of the huge ruckus over BP's oil spill in the Gulf of Mexico. Just one analyst urges selling ExxonMobil, while 12 others recommend a buy, and eight tag it a hold.

"ExxonMobil offers pretty good value, with its enormous assets, solid balance sheet, increasing profits, decent dividend yield of nearly 3% -- and depressed valuation that surely has plenty of upside potential," says Karl Mills, president of investment firm Jurika, Mills and Keifer, which has accumulated shares.

The stock, he notes, is out of favor as a result of the calamitous BP (BP) oil spill and consequent dimming outlook for drilling. But the globally diversified company is the industry's best-managed, particularly since its recent acquisition of XTO Energy, one of the largest natural gas companies.

"So, it's now a bigger company and more diversified than it was at the height of the financial crisis," says Mills. The stock is inexpensive, he adds, trading at a depressed price-earnings ratio of 9 based on his 2011 earnings forecast of $6.70 a share. In 2007, ExxonMobil traded at an average p-e of 11.4. For 2010, Mills expects the company to earn $5.80 a share.

A+ Quality Ranking from S&P

Analyst Paul Y. Cheng of Barclays Capital, one of the analysts who met recently with CEO Tillerson, came away impressed with the company's prospects. He reiterated his outperform rating. "We think the stock offers a compelling valuation for our long-term investors," says Cheng His 12-month price target for ExxonMobil is $81 a share, based on his earnings estimate of $5.60 a share for 2010 and $6.50 for 2011.

The prestige of ExxonMobil as a "quality" company has remained intact. It has "enjoyed a superior degree of earnings and dividend growth and stability," says Tina J. Vital, oil analyst at S&P, who rates ExxonMobil as a strong buy. (S&P gives ExxonMobil a "Quality Ranking of A+.) She says the company will benefit from growth opportunities in deepwater drilling and liquefied natural gas (LNG), as well as from ventures with state-owned oil companies.

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ExxonMobil's advanced technology, she notes, permits project development in a timely and cost-efficient manner. Its upstream exploration and production operations should benefit from the company's long-lived resources, says Vital, while its downstream refining unit should benefit from its huge complex of refineries that offer feedstock and product flexibility.

Serving customers in more than 200 countries (the U.S. accounted for 30% of sales in 2009), ExxonMobil is, indeed, a global giant, maintaining the largest portfolio of proved reserves and production in North America. And it's the biggest net producer of oil and gas in Europe. In the world of refining, ExxonMobil believes it's also the largest operator.

For a super-behemoth in the oil patch, ExxonMobil has a humble valuation. To the bulls, that means the stock can move only higher from its depressed level.
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