1 Analyst Says ExxonMobil Stock Is a Buy

Markets Motley Fool

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

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One analyst downgrade. One price target cut. One inflammatory allegation (subscription required) in an investigation by a state attorney general.

June was a long month for shareholders of ExxonMobil (NYSE: XOM) stock to endure -- but at long last, July may be looking up for ExxonMobil investors.

This morning, ExxonMobil stock received its first upgrade in more than a month, when StreetInsider.com (subscription required) reported that analysts at Barclays Capital have rerated the stock to overweight. The news was good no doubt, but is one upgrade by just one analyst reason enough to dive back into ExxonMobil stock despite the ongoing troubles with the oil market?

Here are three things you need to know.

1. Why Barclays is bullish on ExxonMobil

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Let's start with the upgrade itself. Over the past year, ExxonMobil stock has lost 15% of its value in a stock market that has risen 14%. This recent underperformance, says Barclays, is unfair to Exxon given the company's "leading near-term position" in a market where oil is cheap, and its ability to profit further from sales of liquefied natural gas and petrochemicals. In the analyst's view, Exxon stock is worth far more than the $80 and change that its shares currently fetch -- as much as $94 a share, in fact.

2. What other analysts say

Barclays' emphasis on Exxon's ability to earn profits, generate cash, and -- crucially -- to continue paying its 3.8% dividend -- could be important to evaluating this downgrade. That's because at the same time as Barclays was making positive noises about Exxon, rival banker Bernstein was updating its forecast for the future of oil prices over the next two years.

As reported on TheFly.com this morning, Bernstein now forecasts that oil prices will hover around $50 a barrel not just this year, but all the way through 2018 as well. OPEC may be cutting production, says Bernstein, but U.S. shale producers will quickly step in to increase production any time oil prices begin to rise again. Moreover, increased oil production by Iran, Libya, and Nigeria threatens to replace any declines in oil production fostered by OPEC's cuts -- negating the effect of those cuts and keeping a lid on oil prices.

3. What it means for ExxonMobil

And that brings us back, full circle, to Barclays' argument that if oil prices remain low, ExxonMobil has this "leading near-term position" to profit even in an environment of cheap oil prices. If oil prices remain cheap, Barclays seems to be saying, then ExxonMobil stock deserves to trade at $94 a share or above. But is that really the case?

As I look at the above chart, I see two recent spikes in Exxon's price, both approaching Barclays' targeted share price of $94. In one case, late last year, this spike correlated with oil prices finally rising above $50. In the other case, mid-2016, oil prices seemed at least to be heading in that direction. Prior to those spikes, though, Exxon rarely reached $94 or more unless oil itself was selling for $90 a barrel or more.

Thus, it seems to me that investors really only value Exxon stock at $94 a share when they think oil prices are going up -- to prices at least better than $50, and ideally, much more than that. As for the idea of ExxonMobil stock being worth $94 a share in a $50-per-barrel (or lower) oil environment, though, I just don't see it.

The most important thing: Valuation

As a matter of fact, I just don't see a lot of value in ExxonMobil shares at any oil price likely to happen any time in the near future. At current oil prices, it seems the most profit ExxonMobil is able to produce is equal to about $11 billion in annual free cash flow. Weighed against the stock's still very expensive $341 billion market capitalization, that works out to a valuation of more than 31 times free cash flow.

Unless oil prices turn around and start growing a lot faster than analysts like Bernstein think possible, I just don't see how ExxonMobil can grow its earnings fast enough to justify that kind of a valuation. That's why, despite the good news of Barclays Capital finally upgrading ExxonMobil stock, I still think this stock is bad news for investors.

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Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool has a disclosure policy.