Last year I wrote that Exxon Mobil Corp (NYSE:XOM) was worth almost $75 per share, based on its average value metrics. But after the company’s recent earnings release on Feb. 1, 2022, it’s clear that XOM stock is worth considerably more.
Exxon projects it will generate massive amounts of free cash flow (FCF) over the next five years. As a result, it decided to initiate a new $10 billion share buyback program, on top of its generous dividend payments.
This is also on top of the company’s ability to pay down large amounts of its debt. This is because it projects on page 13 of its slide deck presentation it will double the cash flow from operations (CFFO) by 2027.
Where Things Stand for Shareholders With Exxon
In the last year, the company generated almost $47.3 billion in CFFO, including asset sales. After deducting $16.595 billion, its free cash flow was $30.5 billion.
This is very high especially compared to its present $335 billion market capitalization. This works out to an FCF yield of 9.1% (i.e., $30.5b/$335b).
On top of that shareholders received dividends of $3.49 per share, which cost just $14.925 billion. That leaves $15.6 billion, which the company could use to buy back shares and reduce debt and increase the dividend. In fact, last quarter the company did raise the dividend per share (DPS) to 88 cents, putting it an annual rate of $3.52.
Moreover, at Feb. 9’s price of $78.99, the dividend yield is still very attractive at $4.46%. Given the 9.1% buyback yield (see above) the company now has a total yield to shareholders of over 13.5%. This makes XOM stock very attractive.
What Exxon Stock Is Worth
There are several ways to value XOM stock. A simple way is to calculate its FCF yield target. For example, assuming that the market eventually gives the stock a lower FCF yield of 6.93% compared to its existing 9.1% yield, the price will rise significantly. This is the average FCF yield, according to Seeking Alpha.
For example, if we assume FCF stays level, we divide $30.548 billion by 6.93% and get a target market cap of $440.8 billion. This is 31.6% above Exxon’s existing market cap of $335 billion and implies a stock price target of $103.95 (i.e., $78.99 price x 1.316).
Another way to value XOM stock is to look at its historical valuations. For example, right now it trades between 11.98 x P/E for 2022 and 12.66 x for 2023, according to Seeking Alpha.
But since Morningstar reports that the average forward P/E in the last 5 years has been 19.7x, it implies a higher price for XOM stock. This year, for example, EPS is forecast to hit $6.60 and next year $6.24, so the average EPS will be $6.42. If we multiply this by 19.70, the price target for XOM stock is $126.47. This is 60% over Feb. 9’s price.
So we have two price targets: $103.95 based on historical FCF yield and $126.47 based on average P/E metrics. A third way is to use its historical dividend yield. Based on a projected higher $3.60 dividend per share (DPS) and its 5-year average yield of 4.28% from Seeking Alpha, the price target is $84.11.
Therefore, our average price target from all three of these methods is $104.84 per share. This is 32.7% (or about one-third) higher than Feb. 9’s price.
What to Do With XOM Stock
Since Exxon stock can conservatively be forecast to rise one-third higher within the next year or so, this implies that the stock is very undervalued. As a result, value investors will consider that now is a good time to average into the stock or even initiate a new position.
They will typically not worry about oil prices and their direction. For example, Exxon projects it will be able to produce large amounts of FCF over the next five years based on its current cost and hedging structure. Page 14 of its slide deck shows Exxon’s projections of $100 billion in cash flow will be available over and above its dividend and capex requirements for the next five years. This will be used to buy back shares and reduce debt. These factors alone, apart from its historical valuation metrics, will move XOM stock higher.
Therefore, long-term patient value investors are likely to see XOM stock rise at least one-third more to $104.84 per share.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com runs the Total Yield Value Guide which you can review here.
