How far is Exxon Mobil Corporation (NYSE: XOM) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by estimating the company’s future cash flows and discounting them to their present value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone who wants to learn a little more about intrinsic value should read the Simply Wall St.
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||US $ 24.7 billion||US $ 23.3 billion||US $ 19.5 billion||US $ 19.6 billion||US $ 18.5 billion||US $ 17.9 billion||US $ 17.6 billion||US $ 17.5 billion||US $ 17.5 billion||US $ 17.6 billion|
|Source of estimated growth rate||Analyst x12||Analyst x8||Analyst x1||Analyst x1||Is @ -5.58%||Is @ -3.32%||Is @ -1.73%||East @ -0.63%||Is @ 0.15%||East @ 0.69%|
|Present value (in millions of dollars) discounted at 8.1%||US $ 22.9k||US $ 20,000||US $ 15.4,000||US $ 14.4k||US $ 12.5k||US $ 11.2k||US $ 10.2k||US $ 9.4,000||$ 8.7,000||US $ 8.1,000|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 133 billion
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 8.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 18B × (1 + 2.0%) ÷ (8.1% – 2.0%) = US $ 294B
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 294 billion ÷ (1 + 8.1%)ten= US $ 135 billion
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is $ 268 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of US $ 61.6, the company appears to be roughly at fair value at a 2.7% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
NYSE: XOM Discounted Cash Flow November 30, 2021
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view Exxon Mobil as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 8.1%, which is based on a leveraged beta of 1.396. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.
While important, calculating DCF is just one of the many factors you need to assess for a business. The DCF model is not a perfect stock assessment tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For Exxon Mobil, we’ve put together three essential aspects you should consider:
- Risks: Concrete example, we have spotted 1 warning sign for Exxon Mobil you must be aware.
- Management: Have insiders increased their stocks to take advantage of market sentiment about XOM’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for every NYSE share. If you want to find the calculation for other actions, just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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