ExxonMobil (XOM) reported strong free cash flow today for Q1 compared to Q4 2024. As a result, value investors are attracted to XOM stock, given its 3.7% yield and low P/E multiple. Moreover, out-of-the-money (OTM) short-put plays in one-month expiry periods have high yields.

XOM is at $105.76 in midday trading on Friday, May 2, after its earnings release before the market opened. XOM is well off its recent highs ($119.04 on April 1 and $121.93 on Nov. 21), but up from a low of $99.93 on April 10.

I discussed XOM's price target in my April 13 Barchart article ("ExxonMobil Stock Looks Way Too Cheap Now With Its 3.8% Dividend Yield"). I argued that XOM stock could be worth $115.76 based on its forward dividend per share (DPS) of $4.04 and average yield of 3.49%. 

But now, based on its strong free cash flow (FCF) results, value investors can project a 20% higher value at $127 per share. This article will discuss this new price target.

Strong Free Cash Flow (FCF) and Projections

Exxon reported that it generated $12.95 billion in Q1 cash flow from operations (CFFO) compared to $12.23 billion last quarter. However, this was lower than last year's Q1 CFFO of $14.66 billion.

Moreover, its free cash flow (FCF) for Q1 was $8.84 billion vs. $7.997 billion last quarter. That represents 72% of its operating cash flow. Over the trailing 12 months (TTM), it has produced $55.02 billion in CFFO, according to Seeking Alpha, and $30.7 billion in free cash flow (FCF). That represented 55.8% of its TTM CFFO. 

So, on average, its FCF represents 63.5% of CFFO. That will be useful in our FCF projection below.

In addition, its Q1 $8.8 billion FCF just about covered its dividend and buybacks of $9.1 billion (what Exxon calls its "Shareholder Distributions"). This can be seen in the graph on page 12 of its shareholder deck.

Exxon's management also reiterated its guidance that by 2030, it will generate an additional $30 billion in cash flow, or $85 billion. That implies its FCF could rise to $54 billion:

   63.5% x $85b CFFO = $54.0 billion.

In other words, its FCF could rise by 76% over the next 5 years (i.e., $54b/$30.7b-1). If this plan comes to pass, the average annual growth on a compounded basis will be 12% each year.

That implies that XOM could be worth considerably more over the long term. Let's look at how to use this to set a price target.

XOM Stock Price Targets

For example, let's assume that ExxonMobil can generate $35.36 billion in FCF over the next 12 months (NTM):

  $8.84b Q1 FCF x 4 = $35.36b NTM FCF

That represents a 15.2% increase over its TTM FCF of $30.7 billion (see above). So, how will the market value this FCF projection?

One method is to add up the average dividend yield and buyback yield over the past 5 years. That would equal a Shareholder Yield metric (equivalent to Exxon's shareholder distribution term). Morningstar does this. Their average Total Yield calculation for XOM stock over the past 5 years is 6.42%. 

So, here is how to value XOM using this Total Yield metric:

  $35.36 billion NTM FCF / 0.0642 = $550.78 billion target market cap

That is 20.15% higher than today's market cap of $458.4 billion, according to Yahoo! Finance. That implies that XOM stock could be worth at least 20.15% more, or:

  $105.76 price x 1.2015 = $127 per share

This means that if the market values the projected FCF over the next 12 months at a yield of 6.42% (i.e., equal to a FCF multiple of 15.6x), XOM could be worth 20% more at $127.00 per share.

Analysts Agree XOM is Undervalued

Moreover, analysts agree with this analysis. For example, Yahoo! Finance reports that the average price target of 27 analysts is $124.41 per share. Barchart's mean survey is close at $124.30 per share. 

These targets imply an upside of 17.6% in XOM stock and are close to the $127 NTM FCF price target above.

In addition, AnaChart, which tracks recent sell-side analysts' price targets and their performance, reports that 29 analysts have an average price target of $129.92 per share.

This shows that analysts are all projecting significantly higher price targets for XOM stock.

One way to play this now, by setting a lower buy-in price and getting paid for it, is by selling short out-of-the-money (OTM) put options. 

Shorting OTM Puts

I discussed this play in my last article on April 13. I suggested that shorting the $100 put option for the May 9 expiry period would provide a 4.23% yield (i.e., $4.23/$100). At the time, XOM was trading for $103.14 and this strike price was 3.0% below the trading price (i.e., out-of-the-money).

Today, that strike price put option is trading for just 35 cents at the midpoint. So the short sellers of these puts have already made a good profit. They can roll this over to a new strike price at a later expiry period.

For example, the May 30 expiry period shows that the $103.00 strike price put has a midpoint premium of $2.08. This is about 3% below today's price and provides an immediate yield of 2.02% (i.e., $2.08/$103.00).

That shows that this is a way to make income while waiting for XOM stock to fall to a lower price. Even if this happens, the investor will have a lower breakeven price:

  $103.00 = $2.08 = $100.92

This is about 4.6% below today's price. Moreover, the dividend yield at this breakeven point is 3.92% (i.e., $3.96/$100.92 = 0.0392). Moreover, the expected forward dividend per share (DPS) of $4.04 would provide a NTM yield of 4.0%.

The downside risk with this play is that XOM could fall below the breakeven point. That could end up in an unrealized loss for investors. However, the dividend yield and target price upside would be significantly higher, as I have shown.

The bottom line is that value investors are attracted to XOM stock, based on its high yield, strong FCF, analysts' target prices, and short-put opportunities.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.