Warren Buffett invested in Exxon Mobil (XOM) last week and it was hard not to notice.
Buffett is the most followed value investor of all time because the mainstream financial press clamour after every little detail of his life. As a consequence ‘Growth’ or ‘Enterprise Value’ stocks have become all the rage when most people think about value investing.
Nate Tobik from the Oddball Stocks blog neatly summed up this reality this week.
But for me it’s not why Warren Buffett invested in Exxon Mobil that excites me. It’s why he chose Exxon Mobil to invest in rather than Chevron (CVX). Both are undervalued by historical standards from an earnings perspective; 9.3 for Exxon and 9.1 for Chevron as per ADVFN.
Both are very different businesses (even though they are both energy companies) and a strict Buffett-type approach to intrinsic valuation would mean a thorough analysis of the business operations of America’s top two energy producers.
Well I’m too lazy for that so instead I’ve collated some statistical data from Morningstar to see if there is more to choosing Exxon for an investment rather than Chevron beyond Chevrons current legal issues.
Here Are 13 Value Metrics For Exxon and Chevron For The Previous 10 Years
Here are my thoughts for the previous 10 years:
- Exxon has posted consistently higher revenue and net income than Chevron, but not earnings
- In 2009 Chevron registered negative free cash flow
- Exxon’s free cash flow has remained positive for the same period
- Both enterprises have a low amount of debt next to their equity
- Exxon’s balance sheet has been weaker than Chevron’s over the last 5 years
The thing is, because of Buffett’s popularity it has become common knowledge that one of his favourite metrics to value a company with is Return On Invested Capital (ROIC). Without going into too much detail, ROIC measures how well the management allocates capital:
A calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. The return on invested capital measure gives a sense of how well a company is using its money to generate returns. Comparing a company’s return on capital (ROIC) with its cost of capital (WACC) reveals whether invested capital was used effectively – Investopedia.com
It is clear that Exxon wins in the ROIC stakes when you place their ROIC numbers side by side:
Okay so we may have the answer as to why Warren Buffett invested in Exxon Mobil rather than Chevron at least from a statistical analysis point of view and this could prove useful to you if you wanted to invest in the same way as The Oracle.
The thing is most people do not stop to think whether they should copy Buffett’s example or not.
The only compelling reason why anyone would copy Buffett’s style would be purely for the intellectual exercise if you were not inclined to strive for absolute returns.
Not striving for absolute returns makes no sense. But the glamour accorded to growth investing has relegated an absolute return philosophy to the second division.
(For non UK readers, the expression second division comes from the old league system in British football before the Premiership whereby the first division was the top tier and the second division the next one down and so on).
Buying stakes in businesses that are selling for less than their tangible assets after all liabilities although statistically proven to outperform all value strategies over the long term has simply been ignored giving value investors who employ such a strategy a huge advantage over the majority of stock market participants.
Why did Warren Buffett invest in Exxon Mobil?
Because he’s Warren Buffett.
- Market Share and Economies of Scale
- Why Free Cash Flow Is Better Than Earnings
- 5 Ways a Large Cap Stock Is Undervalued
- How To Value A Company; The Lazy Investor’s Guide
Images: Big Oil Rig