Morningstar Advisor - June/July 2010 - 58

Investments à la Carte

Stock: ExxonMobil XOM
Morningstar Rating

QQQQQ
Stock Style

Fair Value Estimate $87

Uncertainty Low

Economic Moat Wide

Stewardship Grade X

Morningstar Credit Rating AAA

Value

Blend

Growth

In regard to ExxonMobil’s moat, the entire oil industry benefits from the presence of OPEC. Members of the cartel control roughly 45% of the world’s oil production, but approximately 75% of its reserves. Beyond having a cartel providing a pricing floor under the key commodity it produces, ExxonMobil also benefits from superior operational efficiency. Moreover, its size and financial strength give it an advantage when negotiating for new projects. Because of its expertise and ability to deploy tens of billions worth of capital from internal sources alone, Exxon is an attractive partner for governments looking to exploit their resources. It is no accident that Exxon has the highest profitability in the industry.

As Paul Larson, the editor of Morningstar StockInvestor, wrote in his most recent issue: “I happen to believe that oil prices in the future are going to be higher, perhaps much higher, than in the past as we reach ‘peak oil.’ ExxonMobil will certainly benefit from this. If governments around the world resort to quantitative easing (printing money) to resolve the sovereign debt problems currently outstanding, higher rates of inflation will also ensue. Exxon is not a bad hedge against this scenario. Looking at valuation, despite refining profit margins currently being in the tank (pun intended), Exxon is still expected to earn about $6 per share in 2010, putting the stock at roughly 11-times forward earnings, a very inexpensive price to pay for such a high quality company.” Haywood Kellyw

Hindsight: April/May 2009
Our picks from April/May 2009 have done well. The best performer has been manufacturer 3M MMM, which is up nearly 60%. It’s the same wide-moat, financially sound firm we recommended, but it’s now closer to Morningstar’s estimate of fair value. We still like its prospects, but it’s not the bargain it was a year ago, trading at 85% of MorningPick

Large Mid Small

star’s estimate of fair value. Mutual fund Longleaf Partners LLPFX has also been on a tear. Simply put, most of its holdings that tanked in 2008 roared back in force. Despite the huge runup, the fund is largely standing pat—most of its names still trade for less than 60 cents on the dollar. The fund remains a favorite for long-term investors. Based on its
Back Then, We Said ...

sibling mutual funds’ returns, separate account Keeley Corp. Restructuring Sm-Cap has also been a winner. Our ETF pick, BLDRS Developed Markets 100 ADR ADRD Index, has lagged a bit but has cranked out a solid absolute gain. It still looks like a great way to load up on international blue chips, helping diversify a U.S.-based portfolio. Michael Breen
Now, We Say ...

Type Cum Return to Date (%)

3M Company MMM BLDRS Developed Markets 100 ADR Index Longleaf Partners LLPFX Keeley Instl Corp Restructuring Sm-Cap S&P 500 TR BarCap US Agg Bond TR USD MSCI EAFE Free USD

S ETF MF SA Index Index Index

58.54 30.85 47.67

“The shares appear dirt cheap to us.” “Stock-by-stock, looks like a winner.” “Every miss will be more than offset” “Will continue to outperform over the long run.”

“Reaping benefits of cost controls and innovation.” “Great way to access international blue chips” “Hits bumps but delivers over time.” “Smart management gives it an edge.”

38.63 8.45 33.03

The April/May 2009 issue was mailed to subscribers in April 2009. Return data is from April 30, 2009, through April 30, 2010.

58 Morningstar Advisor June/July 2010

Morningstar Advisor - June/July 2010

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