ExxonMobil Corp (XOM) stock is still well below many analysts' price targets. Based on its strong free cash flow, XOM stock is worth at least $127 per share, or 11% more. Moreover, shorting out-of-the-money (OTM) puts provides a potential lower buy-in.
XOM is at $114.50 in midday trading on Monday, June 23. That is up from its lows but still off recent highs - $119.04 on April 4. However, it has further upside, as I discussed in a May 2 Barchart article ("ExxonMobil's Free Cash Flow is Attracting Value Buyers to XOM Stock").
Moreover, shorting OTM puts helps investors set a potentially lower buy-in price.
FCF-Based Price Target
Last quarter, ExxonMobil generated over $8.8 billion in free cash flow. As page 6 of its earnings release below shows, that was higher than last quarter but lower than a year ago. However, its capex spending rose, so that accounts for much of the differences.
Exxon management said it expects to generate an additional $30 billion in cash flow by 2030. As I showed in my last article, that implies its FCF could rise to $54 billion, up from $30.7 billion in FCF over the last 12 months (LTM).
This works out to a compounded 12% growth rate. Let's assume its FCF stays on a run rate of $8.84 billion per quarter. That means over the next 12 months (NTM), it could generate $35.36 billion in FCF:
$8.84b FCF x 4 = $35.36 billion NTM FCF
That would be 15% higher than the LTM figure of $30.7 billion. If this happens, the market is likely to give XOM stock a 6.43% total yield, according to Morningstar's historical data.
So, here is how we could value XOM stock:
$35.36b / 0.0643 = $550 billion market cap
That means XOM stock could be worth $550 billion sometime in the next 12 months, up from its present market value of $493.2 billion, according to Yahoo! Finance:
$550b / $493.2b -1 = 1.115 01 = +11.5%
That implies a price target of $127.67 (i.e., $114.50 x 1.115).
Analysts Agree XOM is Undervalued
The average analyst price target is $124.03, according to Yahoo! Finance. That is close to the Barchart mean target price of $122.65. These are close to their price targets a month ago, from my prior Barchart article.
However, AnaChart.com, which tracks recent analyst recommendations, shows that the average of 27 analysts is now $134.36 per share. That is up from $129.92 in my last article, and implies a potential upside of +17.3% from today.
The bottom line is that XOM stock still looks undervalued here, both from a FCF standpoint and also based on the average sell-side analyst price target.
However, there is no guarantee this upside will occur over the next year. So, one way to play this is to continuously short out-of-the-money puts.
Shorting Puts to Make Money
For example, in my last article, I suggested shorting the $103.00 strike price put contract expiring May 30. That was almost 3% below the trading price of $105.46 for a 27-day to expiry (DTE) period.
At the time, the premium received was $2.08 by an investor who “Sold to Open” a put contract. That provided an investor a one-month yield of 2.02% (i.e., $2.08/$103.00 = 0.0219).
As it turned out, XOM closed at $102.30 on May 30, i.e., below the $103 strike price. So the put would have been assigned, and a shareholder's account would have bought 100 shares of XOM at $103.00.
But keep in mind that the net breakeven point was $103-$2.08, or $100.92. So, now the investor has a profit (i.e., $114.50/$100.92 = 1.1345 = +13.5% gain). The investor was able to buy XOM at a lower price.
This trade can be repeated. For example, the July 18 expiry period shows that the $110 strike price has a $1.17 put option midpoint premium.
This means that an investor can make a solid 1.0% yield shorting these one-month puts (i.e., $1.17/$110.00 = 0.0106). Moreover, the breakeven point is $110-$1.17, or $108.83. That is about 5% below today's price.
So, this is another great way to set a lower buy-in point for value investors. It also allows existing investors to make extra income.
Moreover, given the $127.67 price target, it provides a potential upside of +17.3%:
$127.67/$108.83 breakeven point = 1.173 = +17.3% potential upside
The bottom line is that XOM stock looks cheap here. One way to play it is to short out-of-the-money (OTM) puts in nearby expiry periods.
That way, an investor can set a lower buy-in point, as seen last month, and also get paid while waiting.
