Exxon a Cash-King?
A closer look at the Tiger

by Phil Weiss (pweiss@homemail.com)

Towaco, NJ (Dec. 11, 1998) -- When I first decided to write tonight's report, I figured that it was just going to give me a chance to bash a company whose products I have not used in years. You see, recently on the Cash-King Companies Board there was some discussion about whether or not Exxon Corp. (NYSE: XON) is a Cash-King. My first reaction was no way. After all, the company merely sells a product that I view as not much more than a commodity, and an inferior one at that. As a matter of fact, while the odometer of the car that I drive to work every day registers nearly 148,000 miles as I write this article, it has not ever had even one drop of Exxon gasoline in its tank.

When I bought my car 8� years ago, I decided that I wanted to do whatever I could to take care of it. My wife and I take this approach as we believe that avoiding car payments whenever possible is a great way to leave ourselves a little extra money for investments and other Foolish endeavors. It also helps us have a little left over to give to a good cause like the Fool's current drive to help raise some money for Share Our Strength. At the time that I bought my car I was told that Exxon's 87-octane gas didn't have detergent in it, so I consciously chose to use other brands of gasoline instead.

Anyway, a number of Fool's on our Companies Message Board were able to convince me that I shouldn't just jump to conclusions about this company as it could merit a closer look. I found this particularly surprising because the company sits in our portfolio right now as one of our Foolish Four holdings. The conversation about Exxon on the message board actually started due to some confusion about this portion of our portfolio.

With the current negotiations between Exxon and Mobil (NYSE: MOB) to form one of the world's largest companies, I thought it might be interesting to look at this company more closely. So, I decided to take it through the Cash-King criteria found in Step 6 and see how the company looked.

  1. Repeat Purchase Business -- If you drive a car you have to keep putting gas in the tank if you want to get anywhere. So, it seems that this company passes this test pretty easily.
  2. Global Consumer Brand -- Exxon gas is sold all over the world (though in some foreign countries it's still sold under the Esso brand name).
  3. Sporting Strong Historical Performance -- As mentioned in a recent Drip Portfolio Report, this stock has done pretty well over the last several years generating a 12-month return of 15.4%, a 5-year annualized return of 19.2% and a 15-year annualized return of 20.8%. That's certainly not too shabby. However, earnings per share (EPS) growth is not up to par with the typical Cash-King as it has grown by only 11.3% annually over the last 5 years.
  4. Super-Size the Company -- With a market cap of over $175 billion and sales of nearly $137 billion last year, Exxon easily exceeds our minimum thresholds of $5 and $1 billion, respectively.
  5. A direction that exceeds the location -- Here's one where I think Exxon falls a little short. According to Zacks, the consensus 5-year EPS growth rate for the company is about 7.2%. That's certainly not a number that gets me excited about the company's future. It certainly falls short of the growth rate of the stalwarts in our portfolio. Plus, with the volume of business already done by this company, I find it hard to believe that it has all that much room for additional growth. As a result, in my opinion the company's pending merger with Mobil is much more based upon the ability to reduce expenses through synergies than it is upon the ability to expand its business through an enhancement of future growth opportunities.
  6. Gross Margin that Exceeds 50% -- Exxon consistently falls just short of our target, as its gross margin is normally around 48%. That's certainly not enough to merit excluding the company from Cash-King status.
  7. Net Margins of at Least 7% -- Exxon hasn't hit our target in any of the last 5 years. However, we often look at direction as being more important than location. Exxon's gross margin had increased from 4.5% in 1994 to 6.2% in 1997. That is an encouraging sign. Unfortunately, this number has gone down to 5.5% for the first three quarters of this year.
  8. Cash No Less than 1.5 times debt -- Of all the numerical criteria, this is the one where Exxon falls short by the largest margin. Cash-to-debt is currently 0.32. This is related to the fact that Exxon's business is so capital intensive. I really don't see anyway that this ratio will get in line with our target level at anytime in the near future.
  9. Efficient Use of Cash -- Here's where we look at our good friend the flow ratio. Exxon actually fares pretty well in this category. The company's flowie has been less than one over each of the last 8 quarters. A closer look at the numbers here tells me that this is a company that has the ability to dictate terms to both its customers and its suppliers. I'd expect that if the proposed merger with Mobil is approved, this strength will be enhanced.

Okay, let's sum things up. Exxon actually fares better than I thought it would. If I forgive the slight shortfall in gross margins, the company falls short in only three of our criteria -- its cash-to-debt ratio is too low, I don't believe that its direction exceeds its location, and its net margin falls a bit short of our target level. Could we view a company like this as a Cash-King?

Probably not.

I don't see a lot of room for improvement in the three categories in which the company falls short of our criteria. Plus, it sells a refined version of a raw material that is a pure commodity. I can only see this one sitting in our portfolio as a Foolish Four holding.

If you have any questions about what's been covered in tonight's report, please ask them in our Cash-King Companies Folder.

If everything goes according to our normal schedule, this will be the last report that I write until next year. So, I'd like to take this opportunity to wish each and every one of you a very happy, healthy, and Foolish Chanukah, Christmas, and New Year. Until then, I'll see you on our Message Boards.

Fool on,


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12/10/98 Close

Stock  Change    Bid
AXP   +  1/2   97.13
CHV   -1 7/16  84.63
CSCO  +  7/16  81.19
KO    -1 1/16  66.06
GPS   -1 13/16 47.94
EK    -  3/8   72.13
XON   -  3/16  73.75
GM      ---    69.06
INTC  -4 9/16  114.63
MSFT  -2 1/16  131.56
PFE   -2 1/8   114.00
SGP   +  7/8   56.63
TROW  -  9/16  36.13
                 Day     Month   Year    History
        C-K      -1.19%   1.97%  24.15%  24.15%
        S&P:     -1.56%   0.12%  15.81%  15.81%
        NASDAQ:  -1.68%   3.41%  20.98%  20.98%

Cash-King Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    131.56    68.09%
    5/1/98 55.5 Gap Inc.      34.06     47.94    40.74%
   6/23/98   34 Cisco Syst    58.41     81.19    39.00%
    2/3/98   22 Pfizer        82.30    114.00    38.52%
   2/13/98   22 Intel         84.67    114.63    35.37%
   8/21/98   44 Schering-P    47.99     56.63    17.99%
    2/6/98   56 T. Rowe Pr    33.67     36.13     7.28%
   2/27/98   27 Coca-Cola     69.11     66.06    -4.41%
   5/26/98   18 AmExpress    104.07     97.13    -6.67%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon         64.34     73.75    14.63%
   3/12/98   20 Eastman Ko    63.15     72.13    14.22%
   3/12/98   15 Chevron       83.34     84.63     1.54%
   3/12/98   17 General Mo    72.41     69.06    -4.62%

Cash-King Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   3157.50  $1279.05
   6/23/98   34 Cisco Syst  1985.95   2760.38   $774.43
    5/1/98 55.5 Gap Inc.    1890.33   2660.53   $770.20
    2/3/98   22 Pfizer      1810.58   2508.00   $697.42
   2/13/98   22 Intel       1862.83   2521.75   $658.92
   8/21/98   44 Schering-P   2111.7   2491.50   $379.80
    2/6/98   56 T. Rowe Pr  1885.70   2023.00   $137.30
   2/27/98   27 Coca-Cola   1865.89   1783.69   -$82.20
   5/26/98   18 AmExpress   1873.20   1748.25  -$124.95

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Exxon       1286.70   1475.00   $188.30
   3/12/98   20 Eastman Ko  1262.95   1442.50   $179.55
   3/12/98   15 Chevron     1250.14   1269.38    $19.23
   3/12/98   17 General Mo  1230.89   1174.06   -$56.83

                              CASH    $120.62
                             TOTAL  $27136.15
*Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98