Shares of Exxon Mobil Corp. rallied Wednesday morning after Jefferies upgraded the energy giant’s stock to “buy” from “hold.” Part of the upgrade was driven by expectations that the company will maintain strong free cash flow generation through 2027.
Free cash flow is the cash left over after a company has paid expenses, interest, taxes, and long-term investments. It is used to buy back stocks, pay dividends, or participate in mergers and acquisitions.
According to Jefferies, Exxon “invested through the cycle while the industry restricted capital,” and “coupled with higher commodity prices, this allowed XOM not only to de-lever but position for visible upstream (Guyana and Permian) and downstream (especially Chemicals) growth.” Jefferies added that the company is “on the front foot,” seeing “attractive risk/reward, particularly for generalists needing energy exposure.”
Exxon was among the top holdings of the FCF US Quality ETF (TTAC) as of September 30. TTAC aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects an average of 144 stocks based on free cash flow strength. Its holdings are then weighted by a modified market-cap log transformation, allowing increased exposure to companies with the strongest proprietary free cash flow rankings.
TTAC’s portfolio will also be rated with an ESG score, excluding companies with low ESG ratings. Firms with an extreme rise in shares count and increase in leverage are excluded.
“By taking a forward-looking, fundamental approach to security selection, TTAC’s holdings are distinct from what advisors would find in a market-cap weighted index ETF,” said Todd Rosenbluth, head of research at VettaFi.
Bob Shea, CEO and CIO of FCF Advisors, told VettaFi that his firm believes that while “GAAP earnings have significant disadvantages,” and “accounting practices allow a lot of leeway and discretion to management… The ability to manipulate and distort free cash flow is a lot more difficult than with earnings.”
“Free cash flow is so important right now, given that the allocation environment has gotten exponentially more difficult in 2022,” Shea said. “Cohorts have never seen an environment like this. In a difficult environment, people want to make sure they understand what they own.”
For more news, information, and strategy, visit the Free Cash Flow Channel.