Exxon: Defensive Play with Growth

Source: http://www.zacks.com/
Posted on Tuesday, August 12th, 2008 | In Market Commentary, Stocks to Watch

Contributed by: Zacks Market Commentaries (http://www.zacks.com/) -

We are maintaining our Buy recommendation and price objective on Exxon Mobil Corporation (XOM) shares following the company’s strong second-quarter results. The company performed strongly in the upstream business, earning $10 billion during the quarter, reaping the benefits of high commodity prices.

Exxon also remained active in returning capital to shareholders during the quarter, paying out over $10 billion through share repurchases and dividend payments. We continue to like the company for its best-in-class upstream business, a chemicals business that is fully integrated with its quality refining assets, an exceptionally strong balance sheet rated AAA, and a track record of returning significant capital to shareholders.

Exxon’s diversified portfolio of assets, both in terms of businesses as well as geographic locations, helps it produce stable results throughout the commodity price cycle. While Exxon shares have all the hallmarks of a defensive play, we believe it has more growth potential than it gets credit for.

Exxon shares have historically traded at a premium to its super-major peers, reflecting its industry-leading returns, financial strength, and a highly regarded management team. Currently, the shares are trading at 7.6x our revised 2009 earnings estimate, which represents a 15% premium to the peer group’s mean.

Relative to the S&P 500, Exxon shares are trading at a 43% discount, significantly wider than historical levels. Our unchanged $105 price objective reflects a 2009 P/E multiple of 10.1x, still at a discount to the overall market.

Exxon reflects our view that the stock’s P/E multiple will expand as visibility regarding greater-than-currently-expected production growth emerges over the next few quarters. Exxon shares are expected to hold up better than its peers in the current environment of a relatively unfavorable macro backdrop for the group as a whole.

Read the full analyst report on XOM

“XOM” Free Stock Analysis: Buy? Sell? Hold?
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