As stated in Exxon Mobil's (XOM) most recent shareholder call, by 2040 the world's population is expected to increase by about 2 billion people for a total of 9 billion earthly inhabitants. During this time overall economic output will more than double. Demand for energy will increase about 60% led by growth in developing countries in the Asia/Pacific region. Oil and natural gas will account for about 70% of energy growth to meet this demand.
By 2040, natural gas is expected to account for 30% of OECD (Organization for Economic Co-operation and Development) demand. Exxon Mobil's acquisition of XTO Energy gives the company strategic exposure to natural gas and the various shale locations from which it is extracted. Its more recent acquisition of the Phillips Company provides XOM with attractive acreage in the Marcellus and Utica Shale.
Exxon Mobil is clearly undervalued with a trailing PE ratio of 10.34, a forward PE of 9.76, a PEG of 1.45, and a price-to-book ratio of only 2.62. Its price-to-sales ratio is attractively under one at 0.93. This is a good opportunity to own a large-cap stock priced at a discount.
The company rakes in $55.34 billion in operating cash flow and $19.87 billion in free cash flow. Its profit margin is 9.47% and its operating margin is 12.48%. XOM had Q4 2011 revenue growth of 15% and quarterly earnings growth of 1.6%.
XOM pays a modest dividend of 2.2%. Exxon Mobil's dividend payments have grown at an average annual rate of 5.7% over the past 29 years. The company increased dividends every year without interruption since 1983. Now that is consistency that investors can rely upon.
XOM exceeded earnings estimates in three out of four quarters in 2011. It has seven positive earnings revisions for 2012 and six positive revisions for 2013. These positive revisions typically lead to more exceeding of earnings estimates.
The company is expected to grow earnings annually at a rate of 7.14% for the next five years. This looks like a conservative estimate. If the company does grow earnings at this rate, the current stock price of $87 should easily rise to $123 in five years. However, this is a conservative estimate and I wouldn't be surprised if the company did much better. XOM should be viewed as a steadily rising stock over the long term that outpaces the S&P 500 (SPY).
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It should be noted that Exxon Mobil is experienced in risk management. This means that the company works to maximize shareholder value while minimizing negative impacts. The principles of risk management are embedded in the company's culture in the form of management commitment and accountability; employee and contractor training; and performance measurement for continuous improvement.
Exxon Mobil has competitive advantages in the form of high cash flow and the ability to use it to strategically develop new technologies for increased efficiencies, which leads to more shareholder value over the long-term.
Disclosure: Although I don't own XOM individually, I do have a position as part of a fund in my retirement account.
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