Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies with a Low Beta. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Exxon Mobil Corp (XOM) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Exxon Mobil Corporation is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. The Company has a number of divisions and affiliates with names that include ExxonMobil, Exxon, Esso or Mobil. Divisions and affiliated companies of the Company operate or market products in the United States and other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. In January 2012, Apache Corporation acquired its Mobil North Sea Limited assets, including the Beryl field and related properties. In April 2013, BNK Petroleum (US) Inc. sold Tishomingo Field, Oklahoma assets other than the Caney and upper Sycamore formations to XTO Energy Inc., a subsidiary of Exxon Mobil Corporation.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$114.20|
|Value Based on 0% Growth||$66.95|
|Market Implied Growth Rate||2.09%|
|Net Current Asset Value (NCAV)||-$26.73|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Exxon Mobil is no longer suitable for the Defensive Investor or the Enterprising Investor. The Defensive Investor now has concerns with the poor current ratio and the lack of sufficient earnings growth over the last ten years. The Enterprising Investor has significant concerns with the level of debt relative to current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Chevron Corp (CVX). From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $6.31 in 2010 to an estimated $7.88 for 2014. This level of demonstrated growth supports the market’s implied estimate of 2.09% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on General Electric (GE)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Be sure to review the previous ModernGraham Valuations of Exxon Mobil Corp (XOM)!
Disclaimer: The author did not hold a position in Exxon Mobil Corp (XOM) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.