As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy ExxonMobil
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does ExxonMobil meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine ExxonMobil's earnings and free cash flow history:
Source: S&P Capital IQ.
ExxonMobil's earnings fluctuate pretty substantially with the price of oil, though the company has managed to remain profitable for more than 15 consecutive years.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity Ratio |
Return on Equity |
5-Year Average Return on Equity |
|---|---|---|---|
| ExxonMobil | 10% | 27% | 30% |
|
ConocoPhillips |
42% | 16% | 8% |
|
Chevron |
8% | 24% | 22% |
|
BP |
41% | 24% | 18% |
Source: S&P Capital IQ.
ExxonMobil generates substantial returns on equity without employing a major debt burden.
3. Management
CEO Rex Tillerson has been at the job since 2006. He's been at Exxon in various other jobs as far back as 1975.
4. Business
Oil and gas exploration and production can obviously be subject to swings in energy prices and spurts of innovation, but so far at least, it's not an industry that's been particularly subject to technological disruption.
The Foolish conclusion
So is Exxon a Buffett stock? Regardless of whether Buffett would buy ExxonMobil, we've learned that the company exhibits the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward industry. To stay up to speed on ExxonMobil's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
