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Exxon Trails Chevron After Russell Ranking Change

Exxon Cuts PDVSA Arbitration Claim to $7 Billion
Exxon Mobil Corp. reduced its arbitration claim against Petroleos de Venezuela SA to $7 billion from $12 billion plus interest. Photographer: Jeff Kowalsky/Bloomberg

Exxon Mobil Corp. is trailing its rivals ever since Russell Investments labeled it a growth stock.

While Exxon, the world’s largest company by share value, has gained 6.2 percent since June 11 when Russell said it would put 92 percent of its market capitalization in the Russell 1000 Growth Index, Chevron Corp. jumped 14 percent and ConocoPhillips rose 12 percent. Russell assigns 95 percent of Chevron to its value gauge and 62 percent of ConocoPhillips.

In a year when Apple Inc. has soared 46 percent and Oracle Corp. increased 17 percent, money managers have failed to embrace Exxon’s new ranking, in part because Russell based its decision on four analysts who lacked a consensus. Robb Parlanti, who manages a fund at Turner Investment Partners that buys the fastest-growing companies, avoided Exxon because he’s skeptical profits will match his other holdings. David Kovacs, who oversees a fund at Turner focused on the cheapest equities, cut his stake after Exxon’s share of the Russell value index shrank.

“What we couldn’t understand was, why does Russell seem to think Exxon’s a growth stock and no one else does?” said Doug Leggate, a Houston-based oil industry analyst at Bank of America Corp. “People are making huge swings in their investment decisions, which is impacting the performance of the shares.”

Rolf Agather, director of index research and innovation at Russell in Tacoma, Washington, said Russell uses a quantitative approach and doesn’t evaluate the estimates it uses.

No Questions

“We don’t question whether the analyst is making the right judgment or not,” Agather said. Russell previously assigned 26 percent of Exxon’s value to the growth index.

Alan Jeffers, a spokesman for Exxon, declined to comment.

Based on estimates from at least 11 analysts, Exxon’s per-share profit is forecast to grow at a 13 percent rate from 2010 to 2012. Chevron and ConocoPhillips are expected to boost profit 9.4 percent and 14 percent, the data show.

Exxon trades for about 10.5 times the average analyst estimate for 2011 earnings, or 15 percent less than the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Its average multiple since 2000 is 14.4 times income in the previous 12 months, data compiled by Bloomberg show. Chevron is priced at 8.6 times next year’s profit and ConocoPhillips 9.2 times.

Exxon today said earnings per share rose 47 percent in the third quarter from a year earlier, to $1.44, five cents higher than the average of 14 analyst estimates. The futures price of crude oil averaged 12 percent higher than in the year-earlier period. Exxon shares rose 0.8 percent to $66.22.

Relative Value

Apple in Cupertino, California, with the second-biggest weighting in Russell’s growth measure, trades for 14 times analysts’ forecast for 2011 earnings, data compiled by Bloomberg show. Redwood City, California-based Oracle, California, with the seventh-largest share, fetches 13 times estimated profit.

While the oil producer accounts for 5 percent of the Russell 1000 Growth Index for the biggest weighting among 626 stocks, the Wells Fargo Advantage Growth Fund, Alger Spectra Fund, Morgan Stanley Capital Opportunities Trust and BlackRock Focus Growth Fund Inc. didn’t have Exxon in their top 10 holdings as of Sept. 30. All four growth funds beat at least 92 percent of their peers during the past five years, according to data compiled by Bloomberg.

‘Surprising’ Increase

“We don’t necessarily view Exxon as a good growth company,” said Patrick Kelly, who manages $4.5 billion at Fred Alger Management Inc. in New York, including the Alger Spectra Fund that has beaten 99 percent of rivals since 2005. The fund hasn’t owned Exxon since 2008. “It was clearly surprising that it was increasing by that magnitude,” he said.

Exxon made up 1.4 percent of the growth measure on June 25, before the index changes were made. Russell says its U.S. equity gauges are used as benchmarks by funds overseeing $3.9 trillion.

Exxon “doesn’t feel like a growth company to me,” said Kevin Rendino, who manages $11 billion including Exxon shares at BlackRock Inc., the world’s biggest asset manager. “Exxon’s valuation is as low as it’s ever been in 10 years.”

Russell uses companies’ price-to-book value and analyst estimates for gains in operating earnings during the next three to five years when determining what companies go in the indexes. The four profit projections for Exxon ranged from 7 percent to 24 percent, with an average of 16 percent, Agather said. A year earlier, the average growth forecast was 2.4 percent, he said.

Exxon trades at 2.4 times book value, or the cost of its assets if sold at liquidation, compared with a 10-year average of 3.4, according to data compiled by Bloomberg.

Starting Points

Some analysts used 2009, when the company earned $3.98 a share, as the base year. Others used 2010, when Exxon’s profit has been lifted by the 142 percent rebound in crude-oil futures from their December 2008 low. Exxon will report income of $5.77 a share this year, according to the average of 20 analyst estimates in a Bloomberg survey.

Using the 2010 estimate as the starting point, the growth forecasts for the four analysts -- from Bank of America, Barclays Plc, Morningstar Inc. and Societe Generale -- would fall to an average of about 11 percent.

The worst financial crisis since the Great Depression spurred declines in stocks and earnings in 2008. The S&P 500 tumbled 38 percent that year and sank to a 12-year low in March 2009. Companies in the U.S. equity benchmark posted their first-ever combined loss in the fourth quarter of 2008. Exxon’s net income dropped 54 percent in 2009.

Growth Forecast

Bank of America’s 7 percent forecast for Exxon’s growth rate was based on earnings-per-share estimates of $5.31 for 2010 and $6.95 for 2014, which have since been revised.

“To categorize it as a growth stock on its earnings is a little challenging,” Leggate said. “To believe it can grow at 16 percent annually, I think, for anyone who knows the stock, would be perceived as a little unusual.”

Paul Cheng of London-based Barclays projected 12.9 percent growth compared with the company’s 2009 earnings excluding some items, using a 2014 forecast of $7.35 a share.

“I have not seen any buy-side investor ever classify Exxon Mobil as a growth company,” he said.

Morningstar’s forecast was 19.5 percent. Allen Good, the Chicago-based firm’s oil industry analyst, said it was probably based on an estimate of $9.68 for 2014 compared with 2009 earnings. He said he doesn’t use estimates beyond 2012 for valuation purposes. Societe Generale’s forecast, 24.3 percent, probably used 2009 as a starting point, Aymeric de Villaret, the firm’s Paris-based oil-industry analyst, said in an e-mailed response to questions. He declined to specify the numbers used to calculate the growth rate. In a July report, De Villaret said Exxon would earn $8.35

a share in 2012. That would give the company an annual EPS

growth rate of 28 percent when compared with 2009.

Societe Generale’s Coverage

Societe Generale stopped covering Exxon on Oct. 10 and will resume following a reorganization, De Villaret said.

“Your base rate makes a heck of a difference,” said William Reichenstein, professor of investments at Baylor University in Waco, Texas, and author of a March 2004 article in the Journal of Financial Planning on how Morningstar assigns mutual funds to growth and value categories. “I have yet to see a single empirical study that says it’s more useful to separate stocks into value and growth using growth variables like the long-term growth rate. It’s kind of a squirrelly number.”

Leggate, who worked as an engineer at Chevron for six years before becoming an industry analyst in 1996, said Russell relied on too few forecasts and should have investigated the gap between the lowest and the highest. Morningstar’s Good agreed.

‘Not Standardized’ Metric

“The fault likely lies with Russell in the fact they used a limited sample of a metric which is not standardized,” Good said in an e-mail.

Agather said the number of firms giving long-term forecasts for all companies has declined and Russell is always looking for ways to improve its process.

It “is something we’re evaluating in our style methodology for future rebalancing” of the indexes, he said. Russell requires at least three forecasts in order to take them into account, Agather said. The firm won’t consider adjusting Exxon’s weighting until the next annual reweighting, he said.

At Turner Investment in Berwyn, Pennsylvania, which oversees $18 billion, Parlanti, the growth manager, added to other energy holdings even though he didn’t buy Exxon.

“We’re looking for companies that have faster earnings growth,” he said.

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