Exxon Mobil (XOM): The Price is Right
Is $14.83 billion in profits all that you can produce? Come on Exxon Mobil (XOM), you can do better than that! In a period of huge oil price gains I would have expected profits double that rate.
Obviously I am being facetious. $14.83 billion in one quarter is a huge dollar amount and the company should be commended. Thank goodness for those government subsidies. I’m not sure where the company would be without them.
Oh, stop it. The oil industry suffered for many years. The industry is mission critical for the economy. It makes sense for the government to support the industry when times were tough.
It was not that long ago when times indeed were tough for the crude industry. Of course that was then and this is now. With oil prices front and center, I suspect many will view the report from XOM in a negative light.
This morning the company announced that the third quarter produced record earnings. XOM generated a profit of $2.86 per share up from the $1.70 made in the same period last year.
The result crushed the analyst estimate of $2.39 per share, but the news was not all positive. In the report it was noted that production was down some 8% in the period. The company blamed hurricanes and increased maintenance activity.
With the decline in production, investors sold shares of XOM. The stock is down 1.5% on a day when the market in general is higher. Given that XOM is trading at levels seen prior to the credit crunch I am not concerned by the selling.
In fact, if you look at the report investors should have been encouraged by the performance of the refining division. There the company benefited from the huge declines in oil prices that began in mid-July.
Profits in that division hit $3.01 billion on wider margins. Such amount marked a 50% improvement. With many refineries struggling, the news there should be viewed positively.
During the quarter XOM took $8 billion worth of shares out of the market via a stock buy-back program. What else are you going to do with all that cash?
How about a dividend? The company’s dividend yield before the report was a little more than 2%. Not only is that number safe, I would guess that investors will see increased dividends given the huge amounts of cash flow.
Shares of XOM traded at a peak of close to $100 when oil reached a crest. At $73 per share the company trades for a mere 8 times December 2008 earnings (estimated to be $8.84).
Such a number is slightly below historical norms, but these are historical times. If a deep worldwide recession continues for an extended period, XOM’s earnings are likely to be lower in 2009 and beyond. To the extent the recession is quick and relatively painless, XOM may return to historical levels.
In my opinion XOM is priced appropriately. No need to hurry up and buy this stock and no reason to sell it if you own it. About the only thing certain is that subsidies may be a thing of the past with a new administration.
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This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
