Exxon Mobil - Time To Take Profits After Strong Recent Momentum

Investors in Exxon Mobil (XOM) are happy with shares on the verge of setting new all time highs. While the long term prospects of the business remain good, as acknowledged by Warren Buffett who recently bought a big chunk of Exxon's stock, analysts and myself are a bit cautious in the short run.

The long term appeal is still there, yet after shares have risen about 10% in merely a month's time, the potential for short to medium term returns has diminished.

Raymond James Is Getting Cautious

Analysts at Raymond James downgraded Exxon Mobil from "Strong Buy" to "Outperform". The entire reason for the downgrade is the strong recent performance, with shares trading up some 10% in the fourth quarter.

Analysts note that the rating does not change the constructive outlook for the oil major. The fundamentals remains attractive as Exxon is set to generate at least as much free cash flow in 2014 as in 2013.

This is despite a lower price outlook at $95 per barrel for Brent and $83 for WTI in 2014. The higher free cash flow guidance does not even allow for capital spending reductions. Note that these price outlooks for 2014 are quite low. WTI currently trades around $97 per barrel with a barrel of Brent trading at $111.

Valuation

At the end of October, Exxon reported its third quarter results. The company ended the quarter with $5.7 billion in cash, equivalents and short term investments. Total debt stands at $21.3 billion, resulting in a net debt position of $15.6 billion.

Revenues for the first nine months of 2013 fell by 10.5% to $327.4 billion. Earnings attributable to shareholders fell by nearly 31% to $24.2 billion, resulting in earnings of $5.46 per share. Annual revenues could come in around $435 billion at this pace, with earnings seen around $32 billion.

Trading around $94 per share, the market values Exxon Mobil at some $411 billion. This values equity in the firm at little below 1.0 times annual revenues and 12-13 times annual earnings.

Exxon Mobil pays a quarterly dividend of $0.63 per share, for an annual dividend yield of 2.7%.

Some Historical Perspective

Long term holders of Exxon Mobil's stock have seen solid returns. Since 2004, shares have steadily risen from levels around $40 per share to highs in their mid-nineties by 2007. After witnessing a pullback towards $60 per share in 2010, shares are attempting to take out all time highs set in 2007.

Note that investors have seen additional returns thanks to steadily increases in the dividends. Note that while shares are only up 7% year to date, investors have seen a solid 10% return over the past month alone.

Between 2009 and 2012, the company has grown its revenues by more than 50% to $467 billion last year. Earnings more than doubled to nearly $45 billion in 2012. Note that both revenues and earnings are set to fall this year. On top of this operational growth, the company retired roughly 10% of its shares outstanding over the time period.

Investment Thesis

Recent momentum in Exxon's shares has been driven by the news that Warren Buffett bought a sizable stake in Exxon, as reported halfway through November. For $3.45 billion, Buffett bought a 0.9% stake in the world's largest publicly traded oil company.

Back at the start of November when Exxon Mobil reported its third quarter results, I last took a look at the company's prospects. At the time, investors were reasonably happy with the report, given the unexpected solid production growth. This news came after two years of production declines. This bullish report and the news of Buffett buying a stake in the business have unleashed a new move upwards, with shares trying to take out new highs.

The very high capital expenditures plans in recent years, allow for this increase in production, which should continue for a while. The production activities move along just fine, yet the poor refining conditions hurt short term profits.

Yet investors are not left on their own. Despite the fact that the company invests huge amounts to boost production, they receive a reasonably solid dividend check, yielding nearly 3% per annum. They receive a similar amount through share repurchases, totaling some $3 billion per quarter, even though the repurchase pace has been higher in recent years.

Still, investors receive a nearly 6% "yield" through dividends and repurchases, around 70% of earnings. As such, Exxon still has over $10 billion left to invest, growing its future production without taking on more leverage.

Little over a month ago, when I last checked upon the prospects for Exxon, I concluded that the current levels around $85 offered a nice entry opportunity. This is especially true after the company reported growth in production and shares have witnessed a short term correction.

In just about a month's time, shares have rallied some 10%. While this move has not eliminated the appeal of Exxon, I agree with analysts at Raymond James. The long term appeal remains, yet the decent move upwards, has limited the immediate potential for the short to medium term.

So shares remain a solid addition to any long term portfolio, yet don't buy shares for the short to medium term, anticipating making a quick buck.

Source: Exxon Mobil - Time To Take Profits After Strong Recent Momentum

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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