According to Morgan Stanley, in light of Exxon’s recently elevated boardroom occupancy of 25% by activists fighting for environmental, social, and corporate governance (ESG) requirements, the corporation will now have to put its focus on the significant shift from fossil fuels to renewable energy.
Exxon said Wednesday evening that a third board candidate nominated by Engine No. 1 had received shareholder approval based on preliminary results. The announcement came after the activist firm was successful in obtaining two board seats at Exxon’s annual shareholder meeting on May 26. Previously, the vote for the third seat was too close to call.
Engine No. 1, which owns 0.02 percent of Exxon and has been eyeing the company since December, claims the oil giant is jeopardizing its financial stability by not investing more heavily in low-carbon technologies. Despite the fact that one of the firm’s four nominees was not elected, Engine No. 1 now controls three of Exxon’s 12 board seats.
“It is significant not only for the company, but also for the broader sector: if this can happen at the largest US Energy company, arguably no public company’s strategy is immune to ESG influence,” Morgan Stanley analysts led by Devin McDermott said.
He cited some of the steps Exxon has taken in the last year to reposition its business, such as cutting capital spending to protect its dividend and committing $3 billion to carbon capture and other emissions-reducing technologies.
According to the firm, Exxon is “well positioned to implement low carbon technologies at scale — helping to mitigate energy transition uncertainty while also offering new attractive growth options for the company.”
In January, Morgan Stanley upgraded Exxon to overweight in a note titled “Better Days Ahead.” The stock has risen 48 percent this year, and the firm expects it to rise another 16 percent to $71.
Exxon’s cost and capital spending cuts, upside to consensus free cash flow estimates, and yield compression due to improved dividend coverage all contribute to the company’s bull case.
Other Wall Street firms are skeptical that the board reshuffle will result in significant changes. Following last week’s vote, in which Engine No. 1 won its first two board seats, Bank of America stated that it will have “no impact” on Exxon’s investment case.
“The activist additions are unlikely to alter XOM’s strategy, which is based on investment in its best-ever project pipeline,” the firm said. “We consider the practical implications to be largely insignificant.”
Bank of America has a buy rating on the stock and a target price of $90, representing a 48 percent increase from Wednesday’s closing price.
Morgan Stanley thinks that if Coca-Cola meets projections this year, it would increase the value of the company.
“In the short term, we anticipate a well-above consensus post-COVID topline/EPS recovery; in the longer term, we anticipate a return to pre-COVID outsized sales growth vs. peers, improved execution under a reorganization, and higher margins with productivity and lower marketing spending,” according to the note.
According to FactSet, the firm’s new price target for Coca-Cola is 15% higher than where the stock closed on Thursday, making it the second highest on Wall Street.
According to Morgan Stanley, other analysts believe the beverage company’s post-pandemic recovery will lag far behind that of its competitors.
“The 35 percent estimated recovery embedded in consensus appears way too low relative to: (1) Q1 2021 revenue (ex days/FX/structural differences) already being back to 2019′s $ level, and (2) other [consumer packaged goods] COVID-impacted peers recovery consensus estimates more in the 70-80 percent range,” according to the note.
Coke reported first-quarter results in April that exceeded expectations on both the top and bottom lines. Year to date, the company’s stock has gained only 1.5 percent.