ExxonMobil Corporation (NYSE:XOM) made headlines reporting an annual profit of $39.5 billion. So what?!
So what if a company capitalized at $440 billion earns less than 10% profit. Suppose you bought the entire company "lock, stock and barrel"; wouldn't you expect to make far greater than that? You would be taking on a massive amount of responsibility and risk! Currency risk, political risk (you go deal with Putin in Russia and Chavez in Venezuela, or worse in Iraq or Iran or Africa), workman's comp for oil derricks in the Gulf Coast and elsewhere, environmental risk, government regulation -- the list is endless.
When I invest, my anticipation is at least a 10% return. Who in the entire investment world would do this, unless of course you were buying bonds paying 5% to 7% without any work. The 70-year stock market average is about 10%.
There is nothing wrong with Exxon Mobil's profit, given its size. It would be sad if they could not make 10%, and consider that they only made this with very high oil prices! If the profits were so high and prospects so good, why isn't there a run on the stock?
Microsoft Corporation (NASDAQ:MSFT) makes far higher profit margins of 30%, Citigroup Inc. (NYSE: C) made 20%, Harley Davidson Inc. (NYSE: HOG) made 17%, Altria Group (NYSE: MO) made 15%. You can find plenty of examples.
The company has a very popular product. Speculators drove up the price in anticipation of higher world demand and the aftermath of hurricane Katrina, and war, and political uncertainty. We have not issued a building permit for a refinery in many decades. Who's fault is that? By the way, speculators include more than commodity traders. What about airlines, shipping companies, power companies and hedge funds, and even governments trying to lock in future contracts in this world of uncertainty?
ExxonMobil reported quarter after quarter of profits in the $10 billion range so it's annual reporting is absolutely no surprise. I saw little effort to conserve fuel in Southern California as evidenced by the freeways and beaches.
How about if ExxonMobil participated in collusion, price fixing, or forced people to buy Hummers (TM) -- now, that would be terrible. But that is what OPEC does every day. Supplies are increased, decreased and voted on by a cartel set up to do exactly that. From what I have read the top seven major (not state-owned or controlled) oil companies (ExxonMobil, Chevron, ConocoPhillips, Occidental, Shell, BP, and Total ) control less than 13% of the known reserves in the world, and if Chavez in Venezuela has his way, it will be less. Do you trust Iran or Venezuela more than ExxonMobil? Is there a difference?
A subject I would be more interested in than XOM's profits are the speculators that bid oil up to $78 per barrel. Did they lose money when oil dropped $20 per barrel? How much did they lose, if they lost? Who lost it? How much money was lost in actual dollars -- millions? billions? Who has that story?
One more thing about pricing. Gasoline adjusted for inflation is a bargain. It has gone up less over the last 30 years than most other things. It was not the price that was outrageous and caused us shock at the pump, it was the rate of increase over a relatively short period of time.
Check out my other posts for BloggingStocks here.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm.
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Reader Comments (Page 1 of 1)
2-07-2007 @ 3:24PM
Nick said...
It would be nice if Exxon/Mobil spread some of the wealth around to its shareholders, instead of just enriching executives who are already bloated!!
2-07-2007 @ 3:33PM
Warren said...
Exxon pays out a decent dividend.
2-07-2007 @ 4:24PM
tom said...
COME ON ITS GOUGING ----ONE DAY ITS 2 NEXT DAYS ITS 3.87 GRERDY BASTARDS
2-07-2007 @ 4:26PM
T Root said...
I also have owned XOM for over 20 years. The stock has been very good to me over the years. With the anouncement of the new CEO at ADM she was previously in a serior mgmt position w/ Chevron I expect some conversation on a buyout of ADM by XOM. I'd be intersted in that move by XOM.
2-07-2007 @ 4:52PM
Bruce E Warnock said...
We have owned XOM for a long time, and now that we are retired, the dividends mean much more to us. The recently declared dividend of $.32 is the fifth straight quarter at that rate. In view of their record profits, outstanding balance sheet and massive cash position, we would have thought they could share the wealth with the shareholders. But it was not to be.
2-07-2007 @ 6:37PM
T Root said...
XOM and ADM is thihs a possible buyout or target for XOM, I think so. Biofuel and the newly annnouncement of the new CEO, proviously a Chevron VP. I expect some discussions. Although small in comparison to XOM i think she wants to be a part of a bigger picture.
2-08-2007 @ 12:51AM
Joe said...
I think your article is right on the money. If people are so worried about the price of gas, go to Europe where gasoline prices are double what we pay here in the US and has been for years. Everyone worries too much about what the oil company executives make. I own ExxonMobil stock and have for years. My stock has consistently made money. I have faith that it will continue to make money. I think the oil companies have done a pretty good job keeping gasoline prices down considering prices around the world and taking care of its shareholders, unlike MCI and Enron. We should also remember the contributions oil companies make to charities and education each year that totals into the millions. I would like to see more articles like this, that tells it like it really is. Joe
2-08-2007 @ 9:12AM
tom said...
Don't be an a stooge to big oil. They are ripping you off. no one needs walmart or a harley we all need oil. oil barron pigs!
2-08-2007 @ 10:30AM
Chris Cunningham said...
While I agree with the theme of your blog in that it is not a big deal for XOM to make $40 billion but you need to check your figures.
Profit Margins Percentage is not based on market capitalization - I do not know what XOM's profit magin is but I believe your figure on MSFT is correct.
However, if you need the MSFT calculation is the same manner as you did XOM their "profit margin" would be about 4.4% ($12.6 billion/market cap of $287 billion).
Again the manner in which you calculated XOM is incorrect and its difficult to take the article seriously when you have this type of error right off the bat.
Again, agree with your thought.
2-08-2007 @ 1:23PM
Sheldon L said...
Chris C.,
Appreciate your comments. You are correct that the profit margins are not based on capitalization. The capitlization of a company is based on what people are willing to pay for that company. I said what I would be willing to pay. I'm looking at XOM on a cash on cash basis. If I bought it outright for $440 billion and I expected $40 billion in profit for my return on this investment (unleveraged) it is 9%. If you look at AOL Money & Finance they indicate a slightly higher profit margin of 11% and it is a trailing figure. Go to: http://finance.aol.com/quotes/exxon-mobil-corporation/xom/nys/fundamentals?freq=1 The reason you cannot do a direct correlation between MSFT and XOM is that MSFT has a higher P/E. Basically people are willing to pay a much higher amount of money to earn a dollar; so while it's margins are higher you are having to pay for the profit more years in advance. If I invest in MSFT, bought the company outright, I would have to wait longer for my money to come back. The reason people pay up in this fashion is they expect the company to expand (growth) and maintain it's margins. If it can't than it is a bad investment. The reason why MSFT looks like a 4.4% return when compared to XOM in the manner you looked at it is that MSFT has a P/E approximately 2.19 times that of XOM (24.82 vs 11.34 at this moment). That is a different story.
2-10-2007 @ 1:30PM
Charlie said...
I work for exxon/mobil for the last 27 years and there a great company to work for. A 10% profit is not bad, its not gouging.I was hoping they would increase the dividend but I understand that they are buying back alot of shares a year. At the refinery I work at, they are spending 700 million this year in mainetinance work alone, upgrades, repairs but capacity is at maximum. The work will not increase production but hopefully reliability.
GO, EXXON/MOBIL