Textbook Problem

Estimating Exxon Mobil Corporation's Intrinsic Stock Value

Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

In this chapter, we described the various factors that influence stock prices and the approaches that analysts use to estimate a stock’s intrinsic value. By comparing these intrinsic value estimates to the current price, an investor can assess whether it makes sense to buy or sell a particular stock. Stocks trading at a price far below their estimated intrinsic values may be good candidates for purchase, whereas stocks trading at prices far in excess of their intrinsic value may be good stocks to avoid or sell Although estimating a stock's intrinsic value is a complex exercise that requires reliable data and good judgment, we can use the Internet to find financial data in order to arrive at a quick "back-of-the- envelope" calculation of intrinsic value.

10. Finally, you can also use the information on the Internet to value the entire corporation. This approach requites that you estimate XOM’s annual free cash flows. Once you estimate the value of the firm's operations and the value of any non-operating assets, you subtract the value of debt and preferred stock to arrive at an estimate of the company's equity value. By dividing this value by the number of shares of common stock outstanding, you calculate an alternative estimate of the stock's intrinsic value. Although this approach may take additional time and involves more judgment concerning forecasts of future free cash flows, you can use the financial .statements and growth forecasts on the Internet as useful starting points.

If you go to the annual cash flow statement financials screen, you will find historical annual free cash flow values. These numbers are useful as a starting point to arrive at an estimate for the next year. Note that you can also obtain historical free cash flows over a 5-year period from Morningstar After entering the company s ticker symbol, simply select the Financials tab, select Cash flow, and make sure the annual dialog box is selected (To find any definitions on Morningstar, scroll down to the bottom of the page, and select Glossary. On the next screen you will see an alphabetic index; just click the first letter of the term for the definition you're interested in.)