6 Reasons to Buy Exxon Mobil

by Dan Burrows | July 20, 2012 8:40 am

Sluggish economic growth in Europe, China, Brazil, India and, gulp, the U.S. has been a huge drag on oil prices and energy stocks. One name, however, has held up better than most and yet still looks like a bargain primed for both short-term gains and long-term value.

We’re talking about Exxon Mobil (NYSE:XOM[1]), the integrated energy giant. It’s the bluest of blue-chip Dow components. It’s the biggest oil and gas company in North America and the biggest oil refiner in the world — and a component of InvestorPlace‘s Real America Index[2], representing the state of Texas[3]. The company that has paid a dividend so dependably that its payouts have grown at an average annual rate of 6% over the last three decades.

Obvious? Maybe. Boring? Yes. But Exxon is the best single integrated-energy stock in the market right now. Here’s why:

  1. Oil Prices: Crude futures traded in New York are back at $92 a barrel after slipping as low as $79[4] less than a month ago. True, that’s a far cry from year-ago highs north of $112, but the long-term outlook for energy prices is up. The global economy won’t sit in a funk forever, and with second-half strength coming courtesy of China and Brazil’s respective stimulus plans, that rebound could come sooner than the market thinks.
  2. Valuation: By both trailing and forward price-to-earnings ratios (P/E), Exxon trades at just 10.5. That’s about 15% below the stock’s own five-year averages, suggesting shares are a bargain. Also, at less than 1.0, shares trade at a compelling price-to-sales ratio. Furthermore, the stock’s price/earnings-to-growth ratio — or PEG, which measures how fast shares are rising relative to their growth prospects — offers a 20% discount to its own five-year average.
  3. Stability: Not only does Exxon make the cut as one of InvestorPlace’s Dependable Dividend Stocks[5], thanks to its long history of regular and rising payouts, it’s also much less volatile than the broader market. With a beta of less than 0.8, XOM is about 20% less volatile than the S&P 500. It’s also less volatile than the wider industry. The energy sector of the S&P 500 has lost 0.8% for the year-to-date, hurt by falling energy prices and the global slowdown. Exxon, meanwhile, is up 1.7%. Add in the 2.7% yield on the dividend, and the total return comes to 4.4%.
  4. Quality: Exxon stands out among the oil majors as the highest quality stock. Just look at the return on equity. Exxon’s ROE stands at 25%. That’s bigger than fellow Dow component Chevron (NYSE:CVX[6]) or ConocoPhillips (NYSE:COP[7]), BP (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A[8], RDS.B[9]).
  5. Growth: Exxon has greater growth potential than it’s oil major peers, too. Analysts peg the company’s long-term earnings growth rate 9%. Chevron is at 1.2%, COP gets less than 1% and BP stands at 5%
  6. Price Momentum: Exxon looks like a core holding, but it could get a nice short-term pop, too, since it has price momentum on its side. Shares are heading into a historically favorable seasonal period, according to data from Thomson Reuters Stock Reports, and it has a tailwind based on relative strength.

If you had to pick just one giant energy stock to play the second-half of the year and beyond, Exxon looks like the best oil major, with fundamentals, valuation and quality all at its back.

Endnotes:
  1. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  2. Real America Index: http://investorplace.com/real-america-index/
  3. state of Texas: http://investorplace.com/real-america-index/texas-exxon-mobil-xom-leading-the-energy-rush/
  4. slipping as low as $79: http://investorplace.com/2012/06/a-chill-for-energy-in-q2/
  5. Dependable Dividend Stocks: http://investorplace.com/dividend-paying-stocks/
  6. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  7. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  8. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  9. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B

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