Valuing Exxon

Most stock valuation chatter on the internet focuses on companies with great growth opportunities like Zoom (ZM), Wayfair (W), and Peloton (PTON), or well known companies whose stocks have outperformed like Apple (AAPL) and Amazon (AMZN). Here we take a look at the other side of the coin and present a valuation of Exxon (XOM). 

Needless to say, the past few years have not been happy ones for Exxon. Plunging oil prices, caused by a combination of COVID-19 and a growing worldwide recognition of the need to transition to sustainable energy, along with a variety of other headwinds have caused Exxon’s stock price (charted below) to drop from a high of $83.38 to a recent low below $33.00.

But all this bad news and the associated dim outlook for the company does not mean that Exxon is necessarily a bad investment. Although academic writing constantly reiterates that investment decision making requires comparing price with value, that dictum is often overlooked in the heat of the moment.

There is little doubt that Exxon faces a troubled future, but is it more or less troubled than the outlook impounded in the market price? The only way to answer that question is to undertake a fundamental valuation analysis.

At the Cornell Capital Group, we have developed a discounted cash flow (DCF) valuation template that can be used to value companies. We began with a DCF model developed by Aswath Damodaran. We then simplified the inputs to make it easier to implement. Finally, we added an additional element to divide the estimated value into three components as given by the equation:

  • Stock price = Book value + Predictable earnings value + Speculative value.

The first component, the book value, can be read off the balance sheet. The second component, the value of predictable earnings, is based on the assumption that the company meets analyst forecasts for the current year and the following year. In all future years beyond year two, the earnings are assumed to be equal to year two earnings.

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An electronic version (excel spreadsheet) of the model can be downloaded here. The detailed numbers ...

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