Exxon Mobil (XOM, Financial) is a vertically integrated energy provider, one of the largest in the U.S. The company possesses a stronghold in many of its operating jurisdictions. I am bullish on the stock, and so is Morgan Stanley (MS, Financial).
Morgan Stanley's call
Morgan Stanely's Devin McDermott raised his price target on Exxon Mobil from $87 to $95 recently, maintaining his overweight consensus. In July of last year, McDermott was quoted saying:
“Improving FCF outlook and dividend sustainability. With a more constructive commodity price outlook, lower capital spending, and additional cash operating cost savings, the dividend is covered in 2021 and averages >100% over the next 5-years on our estimates. Improving dividend sustainability supports yield compression for Exxon Mobil”
Needless to say, McDermott turned out to be accurate in his prediction, with Exxon stock gaining by more than 30% ever since. The fundamentals McDermott used back then are still intact; Exxon's free cash flow has grown by 70.63% year-over-year, and its impressive forward dividend yield of 4.70% remains below the lower bounds at a 60.41% discount to its five-year payout ratio.
The stock is lagging oil prices
Oil prices are continuing to surge as tensions rise in Ukraine. Pratibha Thaker of The Economist recently told Market Watch: "Tensions are seriously heightened between Russia and the West, and if there is an invasion of Ukraine when energy markets are already so tight, the additional risk premium should continue to support prices and push it even higher."
The political implications in Ukraine are the latest in a string of supply chain disruptions in the fossil fuel space. Rising prices have caused civil unrest, and this coupled with supply shortages has caused oil prices to remain inflated.
Exxon Mobil stock is still lagging behind the rise in oil prices, as shown in the chart below:
If we look at it from a cash flow vantage point, the stock is undervalued by 13.85%, which could be substantiated by the belief that prices will increase even further. In addition, Exxon is trading at a discount of 25.05% compared to the average forward price-sales ratio for the oil and gas sector, suggesting that its sales growth hasn't been fully priced in by the market as yet.
Wall Street's take
Turning to Wall Street, Exxon Mobil has a Moderate Buy consensus rating based on six buys and seven holds assigned in the past year. The average Exxon Mobil price target of $77.08 implies 2.87% upside potential.
Concluding thoughts
Exxon Mobil stock is lagging behind the oil price surge. Investors could be drawn to this stock as a value play or/and a dividend option. I expect the stock to pose solid gains during the first half of 2022.
