Should You Buy the Dow — Exxon Mobil

Today, were looking at Exxon Mobil (NYSE: XOM ). Its about as pure an oil play
as you are going to get in the stock market, short of actually buying drums of
oil to store in your basement. Exxon explores for oil and when found refines
it. It also does the same for natural gas. The company also manufactures
products made from petroleum and engages in the transportation of all of the
above. Some of the products it makes include plastics. How many oil wells do you
think Exxon Mobil operates? A few thousand? Wrong. Try 30,000 , all over the
world. The key driving factor for Exxon Mobil is energy consumption. Now, while
demand fluctuates here and there, the world as a whole consumes a lot of energy.
While Exxon Mobil does handle a ton of oil, it doesnt really have much influence
over oil prices themselves. Thats the real determinant in how much profit XOM
generates in any given year. However, as Ive written about before , the world
always will need oil. Virtually everything runs on oil, and will for the
foreseeable future. The U.S. alone consumes 20.7 million barrels daily.
Emerging-markets demand also continues to grow. In other words, no one will get
hurt investing in oil for the long run. With a company like Exxon Mobil, then,
growth isnt super-important. Free cash flow is the thing to keep an eye on
because oil operations are expensive. So as long as free cash flow is chugging
along and exceeds debt service, youre safe in XOM. The company carries $10.3
billion in cash and $12.1 billion in debt at a blended interest rate of only 2%.
Thats extraordinary. Trailing 12-month free cash flow was $26 billion. Yes,
thats billion with a B. The company also has three times the amount of free
cash flow necessary to pay its 2.7% dividend. Stock analysts looking out five
years on Exxon Mobil see annualized earnings growth at 6.5%. Not so hot.
However, earnings are expected to grow 40% this year alone, on top of a 50%
increase in FY 2010. A stock price of $73, on FY 2011 earnings of $8.61,
produces a current P/E of 8.5. BP (NYSE: BP ) trades at 6.15, and Chevron (NYSE:
CVX ) at 8.1. So on a relative P/E basis, XOM is more expensive than its peers.
Conclusion But P/E really isnt the way to value an oil company. The
enterprise-value-to-EBITDA ratio (or EV to cash flow) is a better way to
determine relative valuation on cash flow-rich companies. Chevron is at 4.21,
Exxon Mobil is at 5.61, BP is at 4.65 and ConocoPhillips (NYSE: COP ) is at 3.9.
So Exxon Mobil is the most expensive; however, its net margins are 9.6% to
Chevons 10.6%. Conocos are 5.3%. BP has its share of problems, facing a $30
billion settlement over the Deepwater Horizon spill. Quite frankly, you cant go
wrong with XOM, and its valuation is not so out of whack with its peers to make
it seem terribly expensive. I believe Exxon Mobil is a buy for regular accounts.
I believe Exxon Mobil is a buy for retirement accounts. Lawrence Meyers owns
shares of CVX and XOM.