In this article, let's take a look at Exxon Mobil Corporation (XOM, Financial), a $407.07 billion market cap company that is the world's largest publicly owned integrated oil company.
Past, present and future
The company has a track record of higher returns on capital than its peers. But with the actual environment it is more difficult for the firm to achieve those levels because opportunities are limited.
Exxon needs big projects to justify its investments. Those projects involve several risks such as overinvestment risk, execution risk and budgetary risk. Further, there is much more competition from national oil companies. It is more common that there is a trade-off between taking less favorable terms on the projects or focus on projects where expertise is needed. For example, Exxon and Russia's Rosneft joined in a Strategic Cooperation Agreement, in order to share expertise activities and make exploration in Russia, the U.S. and other countries.
The company also focuses on projects like oil sands and LNG, which are more profitable because they are longer than traditional projects.
Other risks
One important risk –Â the geopolitical risk examples include Russia, Nigeria and Venezuela. Last but not least, commodity risk is always a principal concern if prices decline in the future.
Revenues, margins and profitability
Looking at profitability, revenues declined by 4.55% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.89 vs $1.79). During the past fiscal year, the company reported lower earnings of $7.37 versus $9.70 in the previous year. This year, Wall Street expects an improvement in earnings ($7.57 versus $7.37).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| XOM | Exxon Mobil | 19.46 |
| STO | Statoil ASA | 12.72 |
| EC | Ecopetrol SA | 16.10 |
| OXY | Occidental Pretroleum Corp. | 13.15 |
| TOT | Total S.A. | 12.10 |
| Â | Industry Median | 10.23 |
The company has a current ROE of 19.46% which is higher than the one exhibit by Statoil (STO, Financial), Ecopetrol (EC, Financial), Occidental Petroleum (OXY, Financial) and Total (TOT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 12.1x, trading at the average of the industry. To use another metric, its price-to-book ratio of 2.26x indicates a premium versus the industry average of 1.33x while the price-to-sales ratio of 0.95x is above the industry average of 0.63x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $15,357, which represents a 9% compound annual growth rate (CAGR).
Final comment
As outlined in the article, the oil company reported strong second-quarter results and delivers high returns on capital. Exxon continues benefiting from licenses to explore in the most promising areas, which seems more attractive for long-term investors.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Richard Pzena (Trades, Portfolio) and Manning & Napier Advisors, Inc. added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
