The Motley Fool

This Analyst Thinks Imperial Oil Limited Has 60% Upside

On October 24 Credit Suisse Group AG upgraded Imperial Oil Limited (TSX:IMO)(NYSE:IMO) to “outperform” from “neutral” with a $50 price target (up from $48). That target represents nearly 60% upside.

In September Raymond James Financial, Inc. also upgraded Imperial to “outperform.”

Why is Wall Street getting excited?

The biggest expectation is that Imperial Oil will ramp its free cash flow generation over the next few years, even without major advances in the price of oil. Credit Suisse specifically called for “renewed stock buybacks” once the cash flow generation is realized.

Should you buy Imperial stock today?

One of the best long-term energy plays

For years many analysts have been calling Imperial Oil the next Exxon Mobil Corporation (NYSE:XOM). The reasons are simple.

The biggest factor is that Exxon owns a 69.7% ownership stake in Imperial; ensuring its survival and growth is in its best interest. It should be no surprise that Imperial copied Exxon’s successful financial model: a focus on capital efficiency while returning capital regularly to shareholders through dividends and buybacks.

Imperial also has a very similar operating model.

In 2015 Exxon turned an $18.1 billion profit even as its upstream segment experienced a 75% dip in profitability. This success stemmed from its sizable downstream and chemicals segments.

Imperial has similar advantages. Because of its own chemicals and downstream divisions, it can fund expansion projects even when oil prices collapse. It’s made more than $5 billion from these two segments over the past five years.

Now is the time to buy

So, Imperial clearly has a best-in-class operating model under its watchful parent Exxon Mobil. Why is now the time to buy?

After years of outpacing oil prices and major competitors, Imperial has lagged the market considerably. In downturns, Imperial Oil stock typically outperforms considering its diversified model. In an upward market, it tends to lag for that same reason.

generate_fund_chart

Still, Imperial stock has lagged even close competitors like Suncor Energy Inc. (which has some of the same assets and a very similar business model).

While the market is focused on buying high-volatility energy names to take advantage of rising oil, prudent investors can buy into a long-term, sustainable, proven outperformer at a discount. If energy prices continue to advance, Imperial will, of course, benefit. If they revert to weakness, expect Imperial shares to dominate the competition.

Today, Imperial stock looks like the best of both worlds, especially if you’re cautiously optimistic about the future of oil.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Ryan Vanzo has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.