4 Reasons to Buy Exxon Mobil

THE BEST STOCKS SOMETIMES hide in plain sight. Prime example: ExxonMobil, the world's largest company, based on its stock-market value of $345 billion -- $80 billion more than No. 2 Microsoft.

Like many blue chips, Exxon has been a laggard in this year's rally, even though it boasts the energy industry's best management, best reserves, best returns and best balance sheet. Its shares, at around 72, are down 10% despite a near-doubling of oil prices in 2009. Exxon is the only member of the "supermajor" group of energy producers whose stock (XOM) is down this year, and it's the second-worst performer in the Dow Jones Industrial Average, behind Verizon Communications.

As the leading energy company with the most diversified revenue base, Exxon is the most defensive play in its group, which includes BP (BP), Chevron (CVX), ConocoPhillips (COP) and Royal Dutch Shell (RDS.A). Exxon's defensive characteristics and sheer size have worked against it because aggressive institutional investors now favor oil-and-gas-exploration stocks like Apache (APA) and XTO Energy (XTO), or oil-service stocks like Schlumberger (SLB) that offer more leverage to rising energy prices.

After trailing the market and their smaller brethren this year, the big integrated outfits offer some of the best value in the energy sector, and Exxon looks like the most attractive one. The energy giant does command a higher price/earnings ratio than the other supermajors, but that gap has narrowed this year, enhancing Exxon's appeal. The stock could hit 90 in the next year.

TOP-NOTCH OPERATIONS RARELY come cheaply, and ExxonMobil is no exception. Warren Buffett has said it's better to buy a good company at a fair price than a fair company at a good price. That maxim applies to Exxon, which trades for 18 times projected 2009 profit of about $4 a share, and under 13 times estimated 2010 profit of $5.82. The other big integrated-oil stocks fetch about 10 times projected 2010 earnings.

The 2010 profit estimate for Exxon could prove conservative if the higher energy prices now anticipated by futures contracts materialize. Exxon could earn $6.50 a share or more if 2010 oil and natural-gas futures prices pan out. The company made a record $8.69 a share in 2008, a year when crude peaked at more than $145 a barrel. Exxon's aftertax profit last year of $45 billion was a record for any corporation.

Buffett, incidentally, violated his own rule and paid for that mistake when he invested more than $7 billion in second-tier ConocoPhillips, on behalf of Berkshire Hathaway, rather than buying Exxon. ConocoPhillips shares are 35% below Berkshire's average cost, while an Exxon investment would have lost far less.

Kurt Wulff, who heads McDep Associates, an energy investment-advisory service based in Needham, Mass., calls Exxon "the industry's gold standard" and considers it unusually attractive now, trading for about 80% of what he considers fair value. By his calculations, Exxon typically fetches more than 100% of fair value.

"THIS IS A GREAT COMPANY and it's very well-managed. Everyone in the industry knows that," says Jeffrey Jacobe, director of investments at Fayez Sarofim, a Houston investment-management firm that runs the Dreyfus Appreciation Fund (DGAGX). Jacobe figures that investors effectively are paying nothing for Exxon's refining and chemical businesses, if the company's giant oil-and-gas exploration and production unit were valued in line with independent E&P companies like Apache, XTO and Anadarko Petroleum (APC).

The refining and chemical divisions could be worth $75 billion, or $16 per share. This suggests that fair value for Exxon is close to 90 a share. The stock appears to offer a good risk/reward trade-off because downside seems limited if markets reverse.

Exxon has the best refining assets in the world, with operations in North America, Europe, the Middle East and Asia. Its lucrative chemical business, which is integrated with its refining and energy-production operations, might be more valuable than industry leader DuPont if it were independent.

Most of the supermajors have good balance sheets, but Exxon's is the tops, with net cash (cash less debt) of $2.9 billion at the end of the third quarter. The company is one of only a handful in the U.S. with a triple-A credit rating.

Fayez Sarofim is a rarity -- an investment manager with a big stake in Exxon, which is its No. 1 holding. Most large investors are significantly underweighted in the stock, relative to its 4% share of the Standard & Poor's 500 Index. S&P index funds, not active managers, are the largest holders.

While institutions are unimpressed, individuals have long been attracted to Exxon, and patient holders have been amply rewarded because the stock boasts one of the S&P 500's best historical returns.

Since 1977, Exxon has returned 15% annually, including reinvested dividends, versus 11% for the S&P. Among the few companies with comparable or better returns are Wal-Mart Stores, Berkshire Hathaway and Altria (the former Philip Morris). One reason for Exxon's unpopularity among institutions is that it isn't a get-rich-quick stock. Over time, Exxon has delivered, and should continue to do so for investors, but it lacks the sizzle of smaller energy outfits. McDep's Wulff jokes that "you don't need oil analysts; you can just buy Exxon."