ExxonMobil Corp (XOM) stock is still well below many analysts' price targets. Based on its strong free cash flow, XOM stock is worth at least $127 per share, or 11% more. Moreover, shorting out-of-the-money (OTM) puts provides a potential lower buy-in.

XOM is at $114.50 in midday trading on Monday, June 23. That is up from its lows but still off recent highs - $119.04 on April 4. However, it has further upside, as I discussed in a May 2 Barchart article ("ExxonMobil's Free Cash Flow is Attracting Value Buyers to XOM Stock").

Moreover, shorting OTM puts helps investors set a potentially lower buy-in price.

FCF-Based Price Target

Last quarter, ExxonMobil generated over $8.8 billion in free cash flow. As page 6 of its earnings release below shows, that was higher than last quarter but lower than a year ago. However, its capex spending rose, so that accounts for much of the differences.

Exxon management said it expects to generate an additional $30 billion in cash flow by 2030. As I showed in my last article, that implies its FCF could rise to $54 billion, up from $30.7 billion in FCF over the last 12 months (LTM).

This works out to a compounded 12% growth rate. Let's assume its FCF stays on a run rate of $8.84 billion per quarter. That means over the next 12 months (NTM), it could generate $35.36 billion in FCF:

  $8.84b FCF x 4 = $35.36 billion NTM FCF

That would be 15% higher than the LTM figure of $30.7 billion. If this happens, the market is likely to give XOM stock a 6.43% total yield, according to Morningstar's historical data.

So, here is how we could value XOM stock:

  $35.36b / 0.0643 = $550 billion market cap

That means XOM stock could be worth $550 billion sometime in the next 12 months, up from its present market value of $493.2 billion, according to Yahoo! Finance:

  $550b / $493.2b -1 = 1.115 01 = +11.5%

That implies a price target of $127.67 (i.e., $114.50 x 1.115).

Analysts Agree XOM is Undervalued

The average analyst price target is $124.03, according to Yahoo! Finance. That is close to the Barchart mean target price of $122.65. These are close to their price targets a month ago, from my prior Barchart article.

However, AnaChart.com, which tracks recent analyst recommendations, shows that the average of 27 analysts is now $134.36 per share. That is up from $129.92 in my last article, and implies a potential upside of +17.3% from today.

The bottom line is that XOM stock still looks undervalued here, both from a FCF standpoint and also based on the average sell-side analyst price target.

However, there is no guarantee this upside will occur over the next year. So, one way to play this is to continuously short out-of-the-money puts.

Shorting Puts to Make Money

For example, in my last article, I suggested shorting the $103.00 strike price put contract expiring May 30. That was almost 3% below the trading price of $105.46 for a 27-day to expiry (DTE) period.

At the time, the premium received was $2.08 by an investor who “Sold to Open” a put contract. That provided an investor a one-month yield of 2.02% (i.e., $2.08/$103.00 = 0.0219).

As it turned out, XOM closed at $102.30 on May 30, i.e., below the $103 strike price. So the put would have been assigned, and a shareholder's account would have bought 100 shares of XOM at $103.00.

But keep in mind that the net breakeven point was $103-$2.08, or $100.92. So, now the investor has a profit (i.e., $114.50/$100.92 = 1.1345 = +13.5% gain). The investor was able to buy XOM at a lower price.

This trade can be repeated. For example, the July 18 expiry period shows that the $110 strike price has a $1.17 put option midpoint premium.

This means that an investor can make a solid 1.0% yield shorting these one-month puts (i.e., $1.17/$110.00 = 0.0106). Moreover, the breakeven point is $110-$1.17, or $108.83. That is about 5% below today's price.

So, this is another great way to set a lower buy-in point for value investors. It also allows existing investors to make extra income.

Moreover, given the $127.67 price target, it provides a potential upside of +17.3%:

  $127.67/$108.83 breakeven point = 1.173 = +17.3% potential upside

The bottom line is that XOM stock looks cheap here. One way to play it is to short out-of-the-money (OTM) puts in nearby expiry periods. 

That way, an investor can set a lower buy-in point, as seen last month, and also get paid while waiting.

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.