There are few markets that are as sharply divided between the “haves” and “have-nots” as oil. Fortunately for blue-chip investors, Exxon Mobil Corporation (XOM) belongs to the former category.
Citing optimism in improving financial metrics and greater business efficiencies, Morgan Stanley upped its price target for XOM stock considerably, to $95 from $75. However, the investment firm remains “underweight” on Exxon stock, reiterating commonly cited risk factors such as declining production and rising costs.
Will there be enough of a change to decisively swing analysts one way or another?
Good and Bad for XOM Stock
Make no mistake about it — XOM has been hit hard along with the rest of the oil sector. Sales growth has been negative over the past four years, particularly in 2015 when the oil giant simply cratered. On the profitability side, operating income growth slid a mind-numbing 59% in the last year.
Going hand-in-hand with income worries is the lagging supply chain. Days inventory jumped 58% in 2015. Not helping matters, XOM stock saw a 41% year-over-year supply lift in the first quarter of fiscal year 2016.
On the flip side, Exxon stock is backed by a number of strengths found lacking in so many of its competitors. For one thing, profitability margins have decelerated but are still very much positive. Return on equity is fairly decent, all things considering. And despite the turmoil in the oil markets, XOM stock has remarkably kept its free cash flow account in the black over the past three difficult years.
But how will these fundamentals affect XOM stock moving forward?
While some analysts are sold on the bullish argument, a few insiders are apparently not as optimistic. In particular, Neil A. Chapman, Exxon Mobil vice president, recently unloaded 12,000 shares at $89 a pop.
To be fair, the sale only represented 5% of his holdings, so this may be more a matter of hedging one’s bet. That’s especially prudent, given the exceptionally volatile nature of the oil markets.
Click to Enlarge
To further this point, those shorting Exxon stock are few and far between, and the number of traders who are bearish have declined noticeably since January. This confirms a trend seen in other Big Oil companies like Chevron Corp. (CVX) and BP PLC (ADR) (BP).
Bullish investors are also backed by a series of favorable historical factors. Although the first quarter was a disappointment — shares fell more than 6% against the prior-year quarter — Exxon stock is on pace to hit 6% YOY in Q2.
This would be especially critical. Of the 35 occurrences when XOM was positive for Q2, shares would later go on to register a net profit for the year 30 times. That translates to a solid probability of 86%.
On the other hand, if XOM stock is negative YOY in Q2, the performance for the rest of the year is a coin toss. There were five years in which Exxon Mobil gained, and five years where they came up short.
But if Q1 and Q2 are negative, the probability is decidedly bearish. This is a rarity, having occurred only twice in the 1970s, once in the 1980s, and four times since 2000. It’s unlikely to happen this year, but if it does — watch out! That’s a warning sign you don’t want to ignore.
Click to Enlarge
In addition, there has never been a time when shares have produced three consecutive years of losses. That would imply that 2016 should be a profitable year, since XOM incurred losses in 2014 and 2015.
However, Exxon stock isn’t a guaranteed bet. All consecutive annual losses have occurred in this century. That implies that the most profitable years for XOM stock are behind it.
This is further evidenced when we break down XOM’s annual performance by decade. The pre-2000s era saw shares bring home 19% a year on average. But in the 2000s decade, that average slipped to 9%. So far in the current decade, the rate is less than 5%.
Against the rest of the class, XOM stock enjoys several advantages. That should translate into solid gains for this year, especially if Exxon can maintain its momentum for the remainder of this month.
But investors can’t afford to be as carefree as they might have been during the 1980s and 1990s. The present oil framework is more volatile, and may require a more hands-on approach.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
