Mark R. Hake, CFA
4 min read
In This Article:
ExxonMobil Corp (XOM) stock is still well below many analysts' price targets. Based on its strong free cash flow, XOM stock is worth at least $127 per share, or 11% more. Moreover, shorting out-of-the-money (OTM) puts provides a potential lower buy-in.
XOM is at $114.50 in midday trading on Monday, June 23. That is up from its lows but still off recent highs - $119.04 on April 4. However, it has further upside, as I discussed in a May 2 Barchart article ("ExxonMobil's Free Cash Flow is Attracting Value Buyers to XOM Stock").
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Exxon Stock is Still Cheap Here - Shorting OTM Puts Sets a Lower Buy-In
Moreover, shorting OTM puts helps investors set a potentially lower buy-in price.
Last quarter, ExxonMobil generated over $8.8 billion in free cash flow. As page 6 of its earnings release below shows, that was higher than last quarter but lower than a year ago. However, its capex spending rose, so that accounts for much of the differences.
Exxon management said it expects to generate an additional $30 billion in cash flow by 2030. As I showed in my last article, that implies its FCF could rise to $54 billion, up from $30.7 billion in FCF over the last 12 months (LTM).
This works out to a compounded 12% growth rate. Let's assume its FCF stays on a run rate of $8.84 billion per quarter. That means over the next 12 months (NTM), it could generate $35.36 billion in FCF:
$8.84b FCF x 4 = $35.36 billion NTM FCF
That would be 15% higher than the LTM figure of $30.7 billion. If this happens, the market is likely to give XOM stock a 6.43% total yield, according to Morningstar's historical data.
So, here is how we could value XOM stock:
$35.36b / 0.0643 = $550 billion market cap
That means XOM stock could be worth $550 billion sometime in the next 12 months, up from its present market value of $493.2 billion, according to Yahoo! Finance:
$550b / $493.2b -1 = 1.115 01 = +11.5%
That implies a price target of $127.67 (i.e., $114.50 x 1.115).
The average analyst price target is $124.03, according to Yahoo! Finance. That is close to the Barchart mean target price of $122.65. These are close to their price targets a month ago, from my prior Barchart article.
