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In Chapter 4, we discussed the various factors that may influence P/E ratios. Off the top of your head, can these factors explain why XOM’s P/E ratio differs from its peers?

Words: 601
Pages: 3
Subject: Finance

Estimating ExxonMobil’s Intrinsic Stock Value

In this chapter we described the various factors that influence stock prices and the
approaches that analysts use to estimate a stock’s intrinsic value. By comparing these
intrinsic value estimates to the current price, an investor can assess whether it makes
sense to buy or sell a particular stock. Stocks trading at a price far below their estimated
intrinsic values may be good candidates for purchase, whereas stocks trading at prices far
in excess of their intrinsic value may be good stocks to avoid or sell.

While estimating a stock’s intrinsic value is a complex exercise that requires reliable
data and good judgment, we can use the data available in Thomson One to arrive at a
quick “back of the envelope” calculation of intrinsic value.

Discussion Questions

1. For purposes of this exercise, let’s take a closer look at the stock of ExxonMobil Cor-
poration (XOM). Looking at the COMPANY OVERVIEW we can immediately see the
company’s current stock price and its performance relative to the overall market in
recent months. What is ExxonMobil’s current stock price? How has the stock per-
formed relative to the market over the past few months?

2. Click on the “NEWS” tab to see the recent news stories for the company. Have there
been any recent events impacting the company’s stock price, or have things been rel-
atively quiet?

3. To provide a starting point for gauging a company’s relative valuation, analysts often
look at a company’s price-to-earnings (P/E) ratio. Returning to the COMPANY
OVERVIEW page, you can see XOM’s current P/E ratio. To put this number in per-
spective, it is useful to compare this ratio with other companies in the same industry
and to take a look at how this ratio has changed over time. If you want to see how
XOM’s P/E ratio stacks up to its peers, click on the tab labeled PEERS. Click on
FINANCIALS on the next row of tabs and then select KEY FINANCIAL RATIOS.
Toward the bottom of the table you should see information on the P/E ratio in the
section titled Market Value Ratios. Toward the top, you should see an item where it
says CLICK HERE TO SELECT NEW PEER SET—do this if you want to compare XOM
to a different set of firms. For the most part, is XOM’s P/E ratio above or below that
of its peers? In Chapter 4, we discussed the various factors that may influence P/E
ratios. Off the top of your head, can these factors explain why XOM’s P/E ratio differs
from its peers?

4. Now to see how XOM’s P/E ratio has varied over time—return back to the COMPANY
OVERVIEW page. Next click FINANCIALS—GROWTH RATIOS and then select
WORLDSCOPE—INCOME STATEMENT RATIOS. Is XOM’s current P/E ratio well
above or well below its historical average? If so, do you have any explanation for why
the current P/E deviates from its historical trend? On the basis of this information,
does XOM’s current P/E suggest that the stock is undervalued or overvalued? Explain.
5. In the text, we discussed using the dividend growth model to estimate a stock’s intrin-
sic value. To keep things as simple as possible, let’s assume at first that XOM’s divi-
dend is expected to grow at some constant rate over time. If so, the intrinsic value
equals D1/(r s  g), where D 1 is the expected annual dividend 1 year from now, rs is the
stock’s required rate of return, and g is the dividend’s constant growth rate. To esti-
mate the dividend growth rate, it’s first helpful to look at XOM’s dividend history.