Stock Picks: V Up, XOM Down

Exxon Mobil (XOM) shares lost ground after news that the company will purchase XTO Energy (XTO) in an all-stock deal worth $41 billion.

Under the terms of the deal, Exxon will issue 0.7098 common shares for each common share of XTO. That represents a 25% premium to XTO’s closing price on Friday. The deal, which requires XTO shareholder approval, is expected to close in the second quarter of 2010.

Exxon said the acquisition should allow the company to develop additional supplies of unconventional oil and gas resources.

“With substantially all of XTO's operations in the U.S., and a reserve base with an 85% natural gas weighting, we expect the transaction will more than double XOM's US natural gas reserves,” Collins Stewart analyst Katherine Minyard said. Stewart estimates the transaction will increase Exxon's worldwide production by 12%.

How much does Exxon think the deal is worth? Exxon appears to be paying a more generous price for XTO’s resources than the value of its own underlying resource base, according to Minyard, who has a hold rating on the stock. And given the size of the acquisition, relative weakness in the North American natural gas market and the generous pricing of the deal, Minyard says Exxon's stock is likely to underperform other integrated oil stocks.

The bottom line:
“Despite the fact that [Exxon] is in a strong financial position, and is a company that seeks to create value over the long term, we believe the shorter-term outlook may govern the stock's performance on the heels of the announcement,” Minyard wrote.

Visa (V) shares were rising early Monday after an upgrade from Robert Baird analyst David J. Koning.

Koning raised his rating for the stock to outperform on growth prospects. “We view risk/reward as attractive at the current level, particularly given tangible recent improvement in key metrics like transactions, volume, and international travel,” he wrote in a note.

Koning says the company’s growth is accelerating behind improving retail sales, gas prices, international travel and currency. He adds that the company has a big cash balance and that the threat of near-term legislation is “reasonably low.”

Longer-term, the analyst cites a continued shift to card usage and modest pricing increases, and says that margins, though already high, could continue to rise.

The bottom line:
“We expect reaccelerating growth over the next couple quarters, along with annual [earnings per share] growth of 20%+ over the next couple years, and expect both to drive strong stock performance over the next year,” Koning wrote.

In conjunction with the upgrade, Robert Baird increased its price target for MasterCard to $300 in light of “reaccelerating revenue” and possible upside to 2010 estimates.