Exxon Mobil (NYSE:XOM) remains a value trap risk so long as the pandemic threatens the economy. The second round collapse in oil prices is hurting the major integrated giants in the space. XOM stock peaked in June after investors bet that energy prices would firm up.
Instead, renewed concerns over the coronavirus outbreak are devastating energy prices.
Furthermore, as workers continue to work at home in droves this fall and winter, Exxon stock may likely underperform for longer.
XOM Stock Downtrend
When Exxon reports third-quarter results, it may post worsening losses. In a post that listed factors that could impact its earnings, the company cited sales volumes, refining margins, and oil and gas prices as the headwinds it faces.
It could lose as much as 68 cents a share. Investors must take a macro stance on the energy market’s demand levels ahead.
Exxon’s refining business may face lower margins in the quarter, disappointing investors. Conversely, if suppliers cut output and e-commerce continues gaining steam, oil prices may recover.
Once oil prices show signs of improving, Exxon’s prospects will look better. So, instead of investing in Exxon alone, investors may buy a basket of stocks.
This includes holding the Energy Select Sector SPDR Fund (NYSE:XLE) or the Vanguard Energy Index Fund (NYSE:VDE). Still, Exxon is an oil and gas integrated giant whose stock trades at a steep discount.
Valuations on XOM Stock
Exxon has a debt-to-equity of 0.39 times. Its price-to-earnings is in the 20s range but if earnings fall, the multiple goes up. Shareholders who have a paper loss are comforted with a dividend that pays around 10%.
While the yield is attractive, the market is also signaling the risks of a dividend cut ahead.
For example, Wells Fargo (NYSE:WFC) printed a dividend yield of around 8%. When the diversified bank slashed it, the yield fell to ~1.7%. General Electric (NYSE:GE) used to pay a dividend until it slashed nearly all of it. The conglomerate now pays only one cent a share in dividends quarterly.
Exxon did not waste its resources on hand to buy out weaker companies. CVX Energy (NYSE:CVX) almost bought Anadarko once. Instead, Occidental Petroleum (NYSE:OXY) took it, costing the company $55 billion and saddling it with debt that it could hardly manage.
If Exxon waits out the energy market downtrend and keeps its balance sheet clean, it positions itself to rebound when the market improves.
In a 5-year discounted cash flow model, investors may forecast a nearly 30% revenue drop this fiscal year. By fiscal 2021, if revenue rebounds and grows by 15%, the stock’s fair value is around $40.00.
|(USD in millions)|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||11.90%||11.40%||13.00%||15.00%||15.00%||14.00%|
On Wall Street, only 10 analysts offer a rating on Exxon stock. The average price target is $45.00, according to Tipranks.
That takes into account the experts having a 17 cent earnings per share loss forecast. It also implies that the next quarter or two will disappoint investors. From there, prospects improve as Exxon cuts costs and reports better operating cash flow.
Exxon is a cyclical stock that is not for the faint of heart. The energy cycle moves in a cycle. Currently, it is on a sustained downtrend driven lower by the pandemic. Had the world stopped the pandemic, energy prices would have rebounded by late summer.
That did not happen.
Vaccine research might bear fruit and lead to a quicker rebound in the economy by early next year. Investors may invest now in Exxon at current prices, getting rewarded in the process.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.